Journal of Financial Planning: February 2018
According to a 2017 study from the Employee Benefit Research Institute, only 61 percent of responding American workers reported having saved money for retirement, with 56 percent of respondents reporting they are currently saving (at the time of the survey) for their golden years. Only 18 percent of respondents felt very confident that were doing a good job preparing for retirement, and another 38 percent felt somewhat confident.
As a financial planner, this isn’t news to you, though it may be more disappointing for you than most given your line of work. As someone on the frontlines of trying to help people understand the value of saving for anything later in life, you know it can be an uphill battle.
Presented here are a few tools to help your clients get past some of the standard pitfalls around saving, using the very science that generates the issues as your weapon. Helping clients understand the reasons behind why we make excuses to avoid saving may be just what they need to overcome these challenges.
Excuse No. 1: I Don’t Have Enough Money to Save
For some people, this is a valid excuse. If the money’s not there, it’s not there. For others, however, it may be the type of Catch-22 situation that you can help attempt to reverse simply by understanding behavioral tendencies. The old adage telling us that “the more we make, the more we spend,” is actually deeply rooted in behavioral science.
One of the more useful qualities we have as human beings is our ability to quickly adapt to changing circumstances. But some experts like James Roberts, professor of marketing at Baylor University, believe that our adaptability may hinder us in terms of saving and spending. He uses the example of a college student who wants to get out of his or her dorm, then moves into a rental house but gets tired of having roommates, then dreams of a small house, then a bigger house (and on and on from there) to show that our minds very quickly move on to the next step when we attain a goal or desire.
Another reason behind our penchant to overspend and under-save is simply that we may have seen it from our parents and then modeled the behavior. Over time, we foster and intensify these bad habits which, as we all know, can be extremely difficult to break. However, some researchers believe that we have the ability to change almost any habit through repetition via a series of mental processes.
While you (and by extension, your clients) can be the judge of whether this might work for you, I would recommend picking up the book The Power of Habit by Charles Duhigg, which takes a serious look at habit formation and the science behind why we do what we do. Besides the interesting case studies and frameworks, the heart of Duhigg’s theory centers on the importance of simply understanding that habits can be broken:
“Once you understand that habits can change, you have the freedom—and the responsibility—to remake them. Once you understand that habits can be rebuilt, the power becomes easier to grasp, and the only option left is to get to work.”
The point? Clients may be, in some ways, relieved to hear that the negative behaviors that keep them from saving money are not totally their fault (thanks a lot, science), but an equally important part of the message is that there are ways to fight to overcome these ingrained habits.
Excuse No. 2: Retirement Is Too Far in the Future to Focus on Today
I was meeting friends at the National Western Stock Show in Denver a few years ago, and when I arrived, I realized that I hadn’t purchased tickets (and as a result, probably could have reached up and touched the roof from the nose-bleed seats I had to grab on-site). My immediate thought was, “How did you not think to do the one thing you needed to do prior to attending that event?”
According to a recent study, part of the answer (beyond my own struggles in staying organized) may be that I made the plans too far in advance for my brain to plan for that contingency. This story dovetails well with one of the most common excuses for failing to save for retirement (or other goals)—people just don’t have the wherewithal to plan that far ahead. If it’s difficult for us to plan for an event a few months down the road, remember that your clients are looking at planning 30 or 40 years into the future.
According to Dale Griffin, associate dean and professor of marketing at the Sauder School of Business at the University of British Columbia, we can look at “temporal construal” and “loss aversion” as potential behavioral biases that make it difficult to make good decisions about our future. Griffin explains “temporal construal” as the tendency for far-off events to be mentally experienced differently than closer events.
“Events or ideas far off in time are thought of in abstract and general terms, with an unavoidable overlay of optimism; so thinking about yourself (or your children) in 40 or 50 years creates a mental image that is akin to pondering a vague, general, overly rosy idea rather than a detailed individual with real problems,” Griffin wrote in a Slate article titled “Planning for the Future: On the Behavioral Economics of Living Longer.”
“Loss aversion,” according to Griffin, is essentially the idea that humans are more likely to think about potential “losses” than potential “gains” in the long term. We are programmed to be more worried about future debt than what we might “gain” by saving for retirement, which may result in attempting to pay off our mortgages or student loans more quickly, at the expense of building a retirement account.
However, the idea that repetitious activities in the present, such as monthly mortgage or student loan payments, can help our minds focus on making decisions to solve long-term challenges in the present, can offer a glimmer of hope from a savings perspective. Specifically, the idea that providing ourselves with short-term rewards or benchmarks (instead of trying to visualize a single “number” or long-term goal), may be helpful in building a saving habit for the long term, and can at least provide a place to start.
In addition, these findings may help you help your clients look at the tendency to not save enough with a fresh perspective, and to consider fresh solutions. Instead of beating themselves up because they failed to meet their savings goal for the third straight month, they could try something more constructive and potentially even fun.
For example, you may recommend that they download one of the many free face-aging apps available for iPhone or Android. AgingBooth and FaceApp are two of the more popular applications that use alogrithms and neural-network technologies to show us what we might look like when we’re much older. Although the accuracy of the imagery is certainly up for debate, I can attest that seeing my face aged years into the future was a disconcerting experience and provided a surprising dose of perspective.
Perhaps these applications give you a unique opportunity to break through the “temporal discounting” barrier and make the idea of aging more real for your clients. MerillEdge, in partnership with Bank of America, was one of the first to launch this type of application in 2014 (called FaceRetirement), and according to Bank of America, 60 percent of the nearly 1 million people who used the app chose to learn more about retirement and beginning to plan for the future.
Excuse No. 3: I Can’t Save Because I Lost Too Much in the Last Crisis
There are certainly situations where this might be true, and if that’s the case, your client is in good hands working with a planner like you. For many others, and especially individuals in younger generations, this “excuse” is a prime example of the “sunk cost fallacy,” the very same behavior that kept me sitting in the theater during the fourth installment in the Transformers franchise instead of walking out after the first 20 minutes.
A “sunk cost” can be defined as any cost (not just monetary, but also time and effort) that has been paid already and cannot be recovered. It’s an extension of loss aversion in that we are programmed to focus more on the costs we have already accrued and can never get back than the future experience we are putting our time, money, or effort toward.
Therefore, the more we invest in something, the harder it may be to let it go (even if it turns out to be a terrible investment). I’m sure that every one of your clients can think of a time where they continued to stick with something for the sole reason that they had already put a lot of money or effort toward its completion—we all have. And to be clear, sometimes that can be a good thing (finishing a degree, completing a rigorous fitness program, climbing a difficult peak, etc.).
Conclusion
The human brain is a powerful tool, and as such, each of the behaviors mentioned here will not be easy to counteract. But because these behaviors are propagated by the mind, understanding the “why” behind our struggles to focus on the future is an important place to start. Learning how these behaviors may affect them in a saving capacity is only the first step for your clients—the next will be helping encourage them to put in the effort on a daily basis to overcome these obstacles.
Your clients are facing an uphill battle, but there’s nobody better than you to help guide them.
Dan Martin is the director of marketing for FPA. Follow him on Twitter at @DanW_Martin.