BlackRock Retirement Institute

To realize your dream retirement, dream about it—literally

Jul 31, 2017
By Sheena Iyengar

The problem

According to BlackRock estimates, to generate even as little as $27,000 per year in retirement requires a savings nest egg of $500,000.1 Research shows, however, that most people fail to accrue savings anywhere near $500,000, let alone higher. In 2013, the National Institute on Retirement Security found that the average working household had virtually no retirement savings–only $3,000 for all working-age households, and $12,000 for near-retirement households.2 With the decline in traditional Defined Benefit plans, growing inequality in wealth distribution, and the questionable long-term future of Social Security, poor retirement savings behavior poses a risk not only to individuals, but to society overall. To avoid a looming retirement crisis, how can we get people to save more?.

Combatting poor savings behavior starts with understanding why people fail to save. There are many reasons why individuals do not take proper steps for their retirement security, and one of the most salient is the shifting dynamics of income. Research has shown that retirement account ownership rates are closely correlated with income and wealth: when household income shrinks, the loss of income precipitates a drop in savings. According to the National Institute on Retirement Security, 90% of American households in the top income quartile own retirement accounts; for the lowest quartile, that number plummets to 25%.3 Looking past household income, a number of studies have documented that retirement account ownership is also correlated with the presentation of choice in a savings plan. For example, Wei Jiang, Gur Huberman, and I showed that more investment choices negatively affected DC plan participation rates—rates peaked at 75% when only two options were available, and dipped to a low of 60% when 59 options were available. Shlomo Benartzi and others have shown that automatic enrollment into retirement plans positively affected participation rates—given only the simple choice of opting in or opting out, 90% of participates elected to stay with the plans in which they were auto-enrolled.4

A solution—innovative persuasion

Beyond managing the number of choices clients have to make, a growing body of research documents how we can influence the motivation to save through minor changes in the way the decision-making process is introduced, pointing to some novel solutions for the problem at hand.

Historically, the investment industry has relied on abstract methods of persuasion—figures tables, numerical models, and statistics—that make it difficult for decision-makers to understand the real need for savings. However, if one can make it more vivid to people why they need to save, there is reason to believe they will. Hal Hershfield and his colleagues found that people who saw their face digitally aged in a virtual reality mirror reported they would save more than twice as much as those who did not.5 One of my own studies with London Business School students showed that by adding real photos and descriptions of the types of apartments they would be able to afford in retirement next to a standard list of savings rates, students elected to save almost 6% more of their salaries. And in a study of ING employees, conducted with Shlomo Benartzi and Alessandro Previtero, I found that adding a paragraph to the standard 401(k) enrollment form that asked people to simply visualize and write down the positive consequences of investing more for retirement resulted in a 20% increase in new enrollments and increased saving contributions by about 4%.

These minor changes in presentation can be key to increasing the motivation to save. To help make the need for savings even more salient, I would ask asset managers and plan sponsors everywhere to consider the three methods described above:

  • Real photographs of housing, restaurants, hotel rooms and more should accompany savings rates and retirement income estimations.
  • Age-morph technology—already used in mobile apps like Snapchat—should allow people to see their elderly faces with their own web-cam or smartphone.
  • Retirement outcomes should be framed in personally salient terms, with reference to more than just statistics. Individuals can be asked to write down and input into a personal profile the positive consequences they imagine as a result of saving more for retirement.

To realize your dream retirement, dream about it – literally

Hear Sheena Iyengar share her ideas on how small and inexpensive, yet innovative and engaging new ways of encouraging people to save can dramatically increase retirement-plan participation rates and overall savings levels.

Sheena Iyengar

About the author

Sheena Iyengar
S. T. Lee Professor of Business and Faculty Director of the Eugene Lang Entrepreneurship Center, Columbia Business School.

Sheena Iyengar has taught courses in leadership and entrepreneurial creativity. Her research addresses the implications of offering people, whether they be employees or consumers, choices. She has examined choice in a multitude of contexts ranging from employee motivation and performance in a global organization, Citigroup, to chocolate displays at Godiva, to the magazine aisles of supermarkets, and to mutual fund options in retirement benefit plans.

Iyengar received the Presidential Early Career Award for her ongoing work in examining cultural, individual, and situational factors that influence people's choice-making preferences and behaviors.