Ignorance is bliss -- or is it?
Based on the latest research, it sounds like financial planners and financial writers are spinning their wheels when it comes to convincing people to save for retirement. No matter their age whether they're young or older, even in their 50s and beyond, a lot of people don't contemplate about the importance of saving for retirement until it finally arrives.
That's a scary thought because unlike our parents and grandparents who received a company pension to go along with their monthly Social Security benefits, the company pension is becoming a relic of the past.
Unless you set aside money in a 401(k), people aren't going to be prepared for retirement.
The problem is it doesn't matter whether people are financially literate or illiterate or whether they have current financial woes are in a good spot financially, says Anek Belbase, a senior research associate with the Center for Retirement Research at Boston College.
People are focused only on their financial satisfaction of today rather than long-term concerns. That's the way we're wired, he says.
"Even if you don't experience these problems, you're not still concerned about retirement. It's still too far in the future," says Belbase who co-authored a study entitled, Dog Bites Man: Americans Are Shortsighted About Their Finances. Our findings confirm the literature that people just care about what is in in the near future. If it's too far away it doesn't affect your day-to-day satisfaction."
Many households have little or no retirement savings and more than 38 million households don't have a 401(k) or IRA, according to the National Institute of Retirement Security. That's 45 percent of the nation's households. It says the median retirement balance is $3,000 for all working-age households and $12,000 for near-retirement households.
The group says based on 401(k) and IRA balances, 92 percent of working households don't meet conservative retirement savings targets for their age and income.
Belbase says researchers thought if might make a difference if people were financially literate and in a better financial position but it doesn't. Age doesn't seem to make a difference either.
"It boils down to extensive literature that says people tend to be shortsighted and things that occur more than a couple of days away or a couple of months away just don't register and doesn't affect you that much," Belbase says. "People go along with their day-to-day problems and feel like they address it, but retirement creeps up on them and it's something that happens way in the future only happens once. It is one of those things that's very hard for people to prepare for."
The lesson for people to learn is to understand that weakness about themselves and instead of focusing on saving for retirement, let it be done for them automatically, Belbase says. That means going to your employer and enrolling in a 401(k) and forgetting about it after that.
"They should be aware of their own weakness," Belbase says. "We're not built to think about the distant future but act today. If they have access to an employer plan, there is no excuse not to spend that five minutes to enroll and then they are on automatic pilot."
For those who are 50 and older and haven't saved a lot for retirement, that's going to be more of a challenge than those who are younger. But Belbase says it's not too late to start and enroll but says those older might have to set aside 30 percent of their pay in a 401(k) to prepare for retirement.
So how does the country deal with the problem when people can't think that far ahead?
The center is an advocate for employers to automatically enroll their employees in a 401(k) plan and many already do. They also back state initiatives that require employers enroll their worker in 401(k) plans even if they employers don't match the contribution of employees.
"What we advocate is people need to be part of employer based pension plan where they are defaulted in," Belbase says. "Once they get defaulted in and see their balance grow, that's when they start seeing the value of saving and get into the habit of it, and that's when they start growing their retirement savings. Even when people might have any inclination to save for retirement, when they're defaulted into a plan, they tend to accumulate a balance over time and then they start saving."
Belbase says about 40 percent of employers, especially small businesses, don't provide a 401(k) plan. It's too much effort for workers in those companies without one to open an IRA and start saving for retirement that way, he says.
"It makes it unlikely for them to put so much effort in to solve a problem in the future," he says.
Belbase praised the recently approved plan in Illinois that goes into effect in 2017 within companies with 25 or more employees. For those who are not part of a retirement plan already, workers will be automatically enrolled into an IRA in which 3 percent of their paycheck goes into them. Employees can choose to opt out of the program known as Secure Choice that some suggest could become a model for the nation.
Bebase says 6 percent is a more preferable amount for people to save, but this program is a start for them.
Those enrolled in the Illinois retirement plan bear the cost of the administration.
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