Saving for retirement is not a priority for many Americans. Current financial opportunities often take precedence and result in delaying or reducing the amount people save for the future. With the average monthly Social Security benefit at $1,335 or $16,020 per year, people need their retirement savings to make up the difference between Social Security and their desired income level. According to Fidelity, sixty-year-olds should have at least eight times their annual salary in savings in order to prepare for a comfortable retirement.
Clearly, the path to retirement is a journey, resulting from an accumulation of choices over many years. Unfortunately along the way, people encounter a myriad of opportunities and challenges that can take them off the path.
According to behavioral economists, saving for retirement is considered cognitively difficult. It requires people to determine how much to save and then have the self-control to follow through to achieve it. Traditional economic reasoning assumes that people are able to make these determinations and do what it takes to make it a reality. Of course, that isn’t necessarily the case. In a recent report from BlackRock, the average Baby Boomer wants to accumulate a nest egg that can support $45,500 a year in retirement income. However, the average retirement portfolio is about $136,000, only enough for an estimated income of $5,440, leaving most people more than $40,000 short of their annual goal.
Behavioral economics can help us understand what factors influence our behavior. Here are a few examples:
These factors cloud our ability to take the necessary steps to ensure a secure financial future. Further, people find it difficult to visualize themselves in the future, so they place a higher value on the short-term than in the unknown longer term. To change these patterns, it’s important to create a connection between the current and future, and remove these influences in order to make objective choices for a more secure and comfortable retirement.