Saving for retirement: the key is to start small

If the powers that be want people to save more, they first need to encourage them to save for smaller splurges

When it comes to convincing people of the need to save money, it might be time to downplay the pressure to set aside retirement savings and the need to fund a 401(k).

What? We know we’re in terrible fiscal shape for our retirements, and the younger we are, the worse the news. Surely we need to hear more about retirement, not less. Just last week, the Pew Charitable Trusts said younger Baby Boomers and members of Generation X face severely diminished lifestyles in their later years, thanks to their relatively high debt loads and financial losses they suffered as a result of the Great Recession.

Yet even as report after report detailing the bad news is released, the net impact of all the talk appears to be … well, nada. The United States savings rate is currently at less than 2.5%.

So hear me out.

The fact is the savings rate would be a lot higher – if lectures and boring articles worked to counteract our natural tendencies to prioritize the present at the expense of the future. But they don’t.

We have, after all, been hearing these things for a long time. As I reported in my recent book Pound Foolish, T Rowe Price claimed in 1994 we were only saving one-third as much as we need for retirement. We all know how effective that study was in getting people to put their pennies away.

The Wall Street Journal might proclaim “College Graduates, You Need to Start Saving Now,” but … really. Generation Y faces enormous student loan bills and a troubled job market. When they do have money to save, they’ve got other things on their mind. According to LIMRA, a trade organization for the life insurance industry, the number one reason Generation Y saves … is to go on vacation. They’re less interested in retiring to Florida than partying there now.

However, it turns out that’s what we should expect.

It’s not natural to think about retirement when you are young. Really it isn’t.

Psychological and MRI studies of the brain reveal that when we are asked to think about ourselves decades into the future, we react as though we are thinking about someone other than ourselves. And, thank you very much, most of us aren’t that interested in putting money aside for some random 85-year-old grandma or grandpa we don’t know.

How bad is it? Even people who write and report on this stuff for a living find they can’t get motivated. “I never thought about retirement before I started writing about personal finance and I barely think about it now,” says Logan Sachon, who turned 29 this past Sunday, and blogs for The Billfold, the popular website about money.

And guess what? Sachon still doesn’t much care for thinking about her golden years now. “Debt and cash flow issues are numbers one and two. Retirement is number ten.”

This sort of sentiment from someone who covers the biz is not a one-off. I hear it constantly, but I can’t start dumping confidences here. You’re just going to have to take my word for it.

If the powers that be want people to save more, they are going to have to get more creative about it. One suggestion: make it easy to save for more than just retirement. Gen Xer Matt Fellowes, the CEO of HelloWallet, a financial advisory firm, recently surveyed the situation and came to the common sense conclusion that if we want people to stop using their 401(k)s as a piggy bank, we need to offer them another way to put money aside.

Fellowes suggests branching out. Many employers already have automatic sign-ups into retirement accounts. How about considering automatic sign-ups into emergency savings accounts? The problem isn’t that taking the money out of our paychecks before it hits our bank accounts doesn’t work. It’s that we’re putting it in the wrong place. Yes, more people contribute to retirement plans since the federal government began allowing employers to opt their employees into such accounts in 2006, but the number of people taking that money out is also on the rise.

“It is unfeasible to work on everything at once,” Fellowes says. Starting small “builds confidence that people can take control of their lives.”

On that note, I’m also a fan of setting up savings accounts within savings accounts. If you divide your savings by the name of your goal for them, the hope is that you are more likely to achieve that goal – whether it is your children’s Harvard education or the bridezilla wedding of your dreams. It’s much more likely than if all the money goes into one pot. “It’s hard to find big banks who will do this for you, although the Meriwest Credit Union, headquartered in San Jose, California, offers something similar called the “You Name It Savings Account.”

In Alcoholics Anonymous, they call this “one-day at a time.” Financial guru Dave Ramsey calls it “baby steps.” Whatever. If it gets people on the road to savings, I’m all for it.

If you want to encourage people to save for goals thirty to forty years in the future, you first need to encourage them to put money aside for smaller splurges. Visa might front the money for a honeymoon in Kuala Lumpur, but it can’t advance what we’ll need for retirement. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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