I recently caught up with Professor Sheena Iyengar of the Columbia Business School to revisit the fascinating tactic she proposed at BlackRock’s recent Retirement Roundtable in New York to help investors save more for retirement [and what she proposes is easy to implement, and extremely effective].
Picture your aging self:
Chip: The trend over the past few decades has been to shift responsibility for retirement outcomes from institutions to individuals but that means that retirement success depends more and more on people making good decisions [such as] saving more, starting earlier, picking appropriate investments, and so on. A lot of people talk about the promise of technology to solve problems, but it’s hard to see how tech can make people save more…[yet] you’ve found a way.
Iyengar: One of the things we learn from BlackRock’s CoRI indexes is how expensive retirement income has become. Owing especially to low interest rates, a savings nest egg of $500,000 will generate only about $27,500 in retirement income. (Estimated annual income is based on the CoRI 2020 Retirement Index for a pre-retired 60-year-old. CoRI estimates are as of 11/23/2016, and are subject to change over time. Retirement is assumed to begin at age 65.) Research shows, however, that most people fail to accrue savings anywhere near $500,000, let alone higher. So it’s imperative to get people to save more.
There are a lot of ways to accomplish that in a self-directed retirement system. Perhaps the most successful thus far are the so-called “auto” provisions: auto-enrollment, which automatically defaults people into retirement plans unless they opt out, and auto-escalation, which automatically increases how much they save from year-to-year.
Chip: How can technology help?
Iyengar: In surprising ways. Combating poor savings behavior starts with understanding why people fail to save. There are many reasons why and technology can help address some of them. 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.
Chip: Why would that be?
Iyengar: People just connect better with concrete visions of their future—and especially of what their future has the potential to be. For instance, 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. Also, 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%.
Chip: So basically what you’re saying is that daydreaming, which most people have always considered to be a waste of time, is actually helpful in this case?
Iyengar: Absolutely.[I also believe the 3 minor changes in presentation outlined below] can be key to increasing the motivation to save…:
- Use [of] 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 webcam or smartphone.
- Retirement outcomes should be framed in personally relevant 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.
Chip: Fascinating. Thanks for taking the time.