We are quite bad at saving, data show. Even when we do save, we often raid our savings.
“For every dollar people are contributing to the retirement savings system, about 40 cents of that money is coming out before people reach their late 50s,” said Brigitte Madrian, professor of public policy at the Harvard Kennedy School. “That’s a quite striking amount of leakage, especially when many people are not saving enough in the first place.”
Work by the National Institute on Retirement shows 6 in 10 Americans are not on track to maintain even most of their standard of living when they retire.
Some people raid their Roth IRA to buy a house — and indeed, use it specifically for that purpose (though they aren’t really supposed to). But raiding one’s retirement accounts is usually a very bad idea, according to most experts.
“Essentially what you're doing is you're cutting yourself off at the knees,” said Jane Delashmutt O’Mara, a portfolio manager at FBB Capital Partners. “You cut yourself out of all of the opportunity for future growth.”
Now, of course life happens — people buy homes, people get sick, people have crises. But one reason we are so bad at saving, according to Harvard’s Madrian, is simply that it “requires giving up something today for something in the very distant future that’s somewhat uncertain, and we’re hard-wired to prefer immediate gratification.”
Starting to save is also a difficult and complicated decision.
“There are a lot of things people have to decide — how much to save, what kind of account, what kind of investment allocation.”
You know what’s a lot easier than making those decisions? Not making them. People don’t decide; they kick the decision down the road, and they worry about it later. That is why economists have come to the conclusion that to get people to save, we kind of need to trick them into doing it.
Dilip Soman, a professor of management at University of Toronto, did an interesting experiment among low-income workers in India. He had the workers paid weekly salaries, with a part of their paychecks set aside in savings envelopes.
“Half people got one envelope, the other half, the same amount was split equally across two envelopes,” he explained.
Three months later, a lot of people had raided their savings envelopes (just like too many people raid their retirement savings).
But the people with two savings envelopes had saved 64 percent more than the people with just one envelope.
“The act of partitioning any resource dramatically slows down the rate of consumption,” Soman said. Here’s an analogy: "Imagine someone gave you a large bag of popcorn versus four smaller bags. Would you eat different amounts? The answer is yes, because with the large bag, you basically make one decision to open the bag. But with four separate bags, every time you finish one bag you now have another decision to make. That’s what’s happening with savings envelopes."
Soman was able to crank up the savings rates another 20 percent by putting photos of employees' kids on the envelopes.
“Guilt plays a huge role,” he said.
Some researchers think employers should set up automatic rainy day funds for their employees, sort of like this envelope study, and some banks are toying with the idea right down to the picture-of-your-kid gimmick.
Bruce Wolfe, a managing director at BlackRock, isn’t particularly convinced.
“My initial reaction is we’re adding another layer of complexity. The more confusing and complicated you make things, the lower the probability they will be used as intended,” he said.
Maybe. But these kinds of tricks — really more like brain hacks — are increasingly popping up in our savings system.
Some employers automatically sign up workers for 401(k) plans and offer an “opt-out” option instead of requiring employees to go through the burden of opting in. Some plans automatically increase the amount deducted from paychecks over time. The idea is to relieve people of making new savings decisions every time they get a raise.