If you haven’t been saving enough for retirement, you can blame it on human behavior.
According to a recent study by the Stanford Center on Longevity, “Although many people know how they should act to improve their financial security and health, they often struggle to implement the requisite behaviors.” 1
While it seems logical to think people just lack a basic education in personal finance, the real reason we fail to save money comes down to behavioral patterns. The study states that, “based on results and recent research in psychology and behavioral economics, education is not sufficient to increase retirement savings.” It goes on to report: 1
- Even if people are aware they should save for retirement, the investing options may be too complex.
- Even if they understand the investing options, they may not be able to put it into operation and continue to do nothing.
- Even if people understand the investing options and put their choices into operation, they may not be able to evaluate their performance.
Over the past few years, retirement plans, particularly employer-sponsored 401(k) plans, have provided the platform and little more, leaving it up to the individual to figure out how much to save and how to factor that into their overall financial picture. The study suggests a complete overhaul to retirement savings programs that would “encourage more effective choices by nudging or guiding individuals towards desired behaviors.” 1 Learn more about how programs can do this in the study.
In the meantime, don’t beat yourself up too much if you haven’t been able to save. Blame it on hardwired behavioral tendencies and systems that don’t seem to cater to it. However, you’re still going to need funds for retirement. Thankfully, the innovative folks in the technology industry have come up with some savings tools that play into your natural need to keep it simple with easy and popular ways to automatically put that money aside.
Set up bank transfers
Take advantage of your bank’s ability to do an automatic transfer from checking to savings accounts. You can set up a transfer of a set amount of money from your bank checking account into your savings or retirement account every time your paycheck is deposited. For example, if you get paid every other Friday, set up a transfer of 10% of the amount of your average paycheck to move into saving on those days. Be sure to check if your bank has any fees for making more than one transfer per month and work around them. Some employer payroll departments will allow you to do a direct deposit into separate bank accounts so you don’t have to do it through your bank.
Automate your 401(k)
If you have a 401(k) through an employer, set up a direct, pretax contribution before it even hits your paycheck. You can start small, such as 3%, and increase it over time. If you have an employer match, you should consider to at least invest that amount so you aren’t leaving any money on the table. Most 401(k) plans also have an automatic increase function that will increase your contribution 1% more each year. You probably won’t even notice the difference of that small amount in your paycheck. But, by doing this, your retirement account will continue to grow over time without you even having to think about it.
Invest with ease
A technique known as “dollar cost averaging” allows you to consistently invest without having to watch the stock market. You don’t even need a lot of money to do it. Just decide on an amount, say $100 a month, and set up an investment plan with a broker to automatically deduct this amount from your bank account. You then decide what individual stocks, mutual funds, or exchange-traded funds (ETFS) you want that money to be put in, and it will be done automatically!
With dollar cost averaging, your investment isn’t contingent upon whether the market is up or down. The amount you invest stays the same, but the amount of shares you can buy may change depending on the stock price, so you buy more shares when the price is low and fewer shares with the price is high. The concept is based on consistent investment over a long period of time so you’re buying your stock at the average price.
If reaching for the credit card is automatic when you shop, then pick one that at least rewards you with cash back. The credit card industry is competitive, and they are all trying to outdo each other with perks to get your business. Do a Google search to find a credit card with rewards that suit you best. Most offer 1-5% cash back on what you spend. If you use just one credit card with great rewards for all of your everyday purchases, such as gas, groceries, lunch, and lattes, you can really rack up the points. Cash in your points and put that free money into your retirement account.
Get the app for that
What if you could put aside a little money every time you shop? The Acorn app does it for you! Just put this app on your phone, hook up your credit or debit card and a mutual fund account. Then every time you make a purchase, Acorn will round up that transaction to the next dollar amount and put the difference aside for investment. When it accumulates a set amount, it transfers your money into a Vanguard-managed account that you set up according to your risk tolerance of conservative to aggressive. By putting aside a little bit every time you spend, you won’t feel so bad about those impulse purchases.
Save while you shop
If you do a lot of online shopping, you’re missing out if you’re not optimized to save on what you spend. Browser extensions from Ebates and BeFrugal offer cashback rewards for many popular online stores. By adding their browser extension buttons, you can activate these cash back rewards with just one click after you land on a participating store website. It automatically routes you to a trackable link to record your online purchase, add coupon codes, and generate your reward dollars. Then you get a check in the mail for the savings! Be sure to put that check straight into your retirement account.
With automation, you can save for retirement by simply setting and forgetting — and letting technology do the work for you. There’s no telling if retirement programs will figure out a better way to play into human behavior or not, but at least you’ll know you’ve got a few tricks up your sleeve to get it done, despite you being you.
Things to Consider:
- A recent study explains a lot about why you might not be saving for retirement.
- Your natural tendency may be to do nothing, but you still need to save.
- Take advantage of technological tools that will automate saving.
1 ”The More Design,” Stanford Center on Longevity, July 2017
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