How you present an issue often is more important than the content itself. This is especially true when the audience is being asked to make a decision. As Nobel Prize winners Kahneman and Tversky demonstrated, people prefer to avoid a loss than obtain a gain. Usually, we focus on the implications of this issue for companies trying to sell services and products to prospective clients.
However, recent studies showing people are making poor financial decisions affecting their retirements inspired us today to address this issue.
As you probably know, people are living longer and generally are healthier than every before. The average life span in America keeps growing â€“ now in the 80s. Hearing about people over 100, even 110 is becoming more commonplace. The possible downside is whether their finances can support them during the 30+ years after they officially â€œretireâ€ â€“ i.e., leave jobs mostly held to produce income. Many traditional wealth management principles, such as switching from an equity-dominant portfolio to one of fixed income bonds to generate a minimum 4% return, wonâ€™t work in todayâ€™s low interest economy â€“ especially if you live longer than you originally thought.
With possible insolvency of the Social Security Trust Fund becoming an issue during the last third of the 20th century, companies increased the extent to which they offered plans to help employees save some money for later. Defined benefit plans, 401Ks and IRAs became options. To encourage people to save some money, some companies offered matching contributions. An entire investment industry was born and lives on today.
Analysis of current trends among younger people suggests they arenâ€™t actively making retirement contributions. One reason is that many do not work for large firms, which traditionally offer such programs; smaller firms may not offer them. Second, money is tight for many, and they feel the need to use funds to live on today. Third, the majority of people over 60 are now reporting they are not planning to retire (stop working for income), within the next 10 years; so this out-of-sight experience is being delayed even more.
For years, my graphic design firm helped companies produce presentations to convince new employees to save some money. We always got feedback that a well crafted and delivered presentation made a difference. In almost all cases, the employee had to ask to participate. Over the years, some companies changed the default â€“ a minimum saving would take place automatically unless the person opted out and/or opted to increase it. Research shows that this default setting increased the percentage of employees who contributed! Undoubtedly, learning that by saving a few dollars each week added up to substantially more over time (due to compounding), made these retirees happy.
Given the recent demographic and economic trends, switching the presentation default from opting in for a savings program, to having to opt-out to not participate makes even more sense. The next time your company is reviewing your plan policy, consider a change. Talk to your advisor about options that others use.
What do you think? Share with us your experiences and insights!