BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

The Real Reason People Don't Save For Retirement

Following
This article is more than 8 years old.

Why do so many people save little – or nothing at all – for retirement? Because the future isn’t real to them. Only today matters. Psychological research bears out this sorry news, which is ingrained in human nature.

According to a survey by the Pew Charitable Trust, only half of American workers are enrolled in a workplace-sponsored retirement plan. And of those, most save only a few percentage points of their pay. More and more companies are using so-called auto-enrollment schemes, where employees are placed in plans like 401(k)s, and must opt out – which is more effective than trusting them to opt in. Still, saving for retirement remains too low.

When planning your financial future, it’s best to look at yourself as two people: your current self and your future self. The second one is who you should be thinking of, not the person you see in the mirror every day.

It’s natural to think of your future self as a different person. Psychologist Daniel Goldstein, in a 2011 TED talk, spoke about the difficulty of imagining yourself as older. Intellectually, we all realize we will grow old, but the concept isn’t real to us. We often don’t even want to think about it.

That makes giving in to temptation right now hard to resist. To Goldstein, the current self is “in control.” It has the power at the moment, which is the only time that seems real. So the current self is strong, getting what it wants when it wants. Meanwhile, the future self is not even on the scene, but far off in this never-never land called the future. Thus, the future self is a weakling with little power over what you are doing.

Another way of looking at the issue is that immediate gratification has enormous appeal. The logic goes this way: Better to take what you can get today because you can’t be sure it – or you – will be around tomorrow. In olden times, when people didn’t live very long, such thinking made sense. Storms, pestilence and wild animals made current needs very pressing. We live with that mental programming now.

What behaviorists called cognitive shortsightedness appears in childhood among modern humans. As seen in the marshmallow experiment. Here, small children hear that they can have a marshmallow right now, or if they wait an hour, two marshmallows. Most of the youngsters opt for the single treat sitting in front of them.

As adults, denying the temptation of today’s treats, as opposed to what they can have tomorrow, is just as hard. According to a study by insurer Northwestern Mutual, a large majority (72%) of U.S. adults think the economy will suffer future crises. But two-thirds of them lack a financial plan.

And a survey from the National Institute on Retirement Security shows that half of American households have no savings for when they are done working. They trust that something will turn up. Or that Social Security will be enough. Or they don’t think about the future at all, because it is so abstract.

As Larry R. Frank Sr., an advisor in Roseville, Calif., puts it: “Saving for retirement often comes down to a simple clash. Your present self wants to spend as much as possible now and your future self wants to reap the rewards of socked-away cash. It’s good bet that your future self will be glad you saved for as long as possible.”

But envisioning how you will behave or what you will need in the future is beyond a lot of people’s ken. This limited thinking appears in everyday spending decisions.

An academic paper finds that gym-goers prefer monthly flat fees for unlimited visits, versus paying for each visit – even though the flat fee approach ends up costing 70% more. Current self expects future self to go to the gym often enough to make the outlay worthwhile, which often is not what happens.

No surprise: People don’t save for tomorrow because, well, it’s as nebulous as a fairy tale. Small wonder that, for a lot of them, when it comes, tomorrow will turn out to be something from the Brothers Grimm.