Could Near-Term Thinking Improve Retirement Savings?

When most workers open a defined-contribution (DC) retirement plan, the emphasis is on long-term thinking.  But a new LIMRA Secure Retirement Institute study recommends that plan sponsors might want to encourage more near-term thinking and promote achievable savings goals for their workers.

Despite their efforts to save for the future, Americans are behind in their retirement savings. On the positive side, 8 in 10 workers who have access participate in their employer’s DC plan.  Less encouraging is the fact that half of Baby Boomers and 60 percent of Gen X and Millennials are not saving at least 10 percent of their income.

The study focused on attitudes and engagement of different generations of workers and found that most people don’t know how much they should save.  Only 3 in 10 Millennials said they knew how much money they should set aside for retirement, while only 4 in 10 Gen X and Boomer workers said they knew the right amount.

This uncertainty is likely contributing to a lack of retirement confidence, according to LIMRA. When asked how confident they are about living the lifestyle they want in retirement, only 40 percent of workers age 60+ say they are.  Among those under age 60, confidence never goes higher than 38 percent.

Academic studies have said our brains are not “wired” for the long-term thinking that is necessary to plan for life after we finish our work careers. LIMRA Secure Retirement Institute suggests that near-term savings milestones might be more achievable.

Plan providers could encourage goals for young workers such as save half a year’s salary by age 30, or three times their salary by age 45. These milestones can make retirement saving less abstract and more concrete.  (See chart)

If the horizons are more in view, workers can become more engaged in their retirement savings plans.  Among DC plan participants, nearly half say they are very involved in monitoring and managing their retirement savings.  Older workers track slightly higher on this statistic than their younger peers.  Yet, only 35 percent among all ages have visited their plan providers’ websites in the past year.

Near-term goals that increase worker engagement could also increase their actual savings and ultimately their confidence about having a secure retirement.

LIMRA