Why do people not save for retirement? Why don’t they invest in 401(k) plans, IRAs, mutual funds, and stocks? We’ve all heard reasons ranging from not having enough money to not fully understanding how saving and investing works. But perhaps there is more to it than that. A 2016 survey conducted by Prudential offers evidence that there may be a personal disconnect that keeps individuals from saving.
The 2016 Prudential Challenge Quiz surveyed almost 50,000 American adults in order to try to better understand saving and investing habits. They discovered that people are more than happy to use their financial resources to do things like taking care of aging parents or helping struggling adult children, yet they seem unwilling or unable to save for their own futures. Researchers call this phenomena “longevity disconnect bias.”
In simple terms, a longevity disconnect bias is a situation in which a person is unable to picture what his own life will be like 20 or 30 years down the road. With that inability to imagine is a lack of desire to prepare. A worker unable to picture himself as a retiree fails to save because he doesn’t know what that means in his 20s. He has no concept of not working and having to draw money from a retirement fund to pay the bills.
This is valuable information for financial advisors and dealer-brokers. If they suspect the longevity disconnect bias exists with any of their clients, there are certain exercises they can go through to help those clients get a better picture of what retirement is like. According to advisors at Western International Securities, creating a vision of the future can be a strong motivator.
Competing Priorities and Expectations
The Prudential survey was structured around something known as behavioral economics. In one part of the survey, participants answered a series of questions relating to pictures of loved ones, strangers, and even themselves (pictures were manipulated to depict them as being several decades older). They were also asked to identify some of the oldest people they knew.
Participant responses revealed that most people expect to live into their 80s or 90s. They are also able to understand the lives of older people they already know, but unable to transfer that knowledge to their own situations. As a result, other things in life take priority over retirement savings.
For example, the youngest workers in America think about things like buying a home and paying off student loans rather than saving for retirement. They think about accumulating property and possessions before having kids, leading to significant debt that inhibits retirement savings. At the core of it all is that longevity disconnect bias.
Once again, the bias prevents younger people from imagining their lives at 65 or 70. For a 25-year-old, retirement seems such a long way off that it is almost unreal. Why spend money now preparing for something so far away when that money can be invested in paying off loans or buying a house?
Overcoming the Bias
Let’s say that longevity disconnect bias truly is the root of not saving for retirement. Such a bias would fully explain all the other reasons financial experts claim people do not save. It would mean that the solution to the problem is finding ways to overcome that bias.
It is clear that Americans aren’t saving enough for retirement. It is also clear that Social Security is not a reliable solution. Therefore, we’ve got to figure out how to overcome longevity disconnect bias if we are to turn things around for the next generation of savers.