“In an ideal world everyone would generate sufficient savings on their own to help fund their own retirement. However most of the data shows that Americans are simply unable to do this on their own.” – Tadas Viskanta
In one of my MBA classes on leadership and organizational behavior we went over the five personality factors and how they relate to successful leadership styles. The factors are conscientiousness, extraversion, openness, agreeability and neuroticism (you’d be surprised how many CEOs score very high on the neurotic and even narcissistic scale).
The one that really stuck out in my mind was conscientiousness. Basically, having this personality trait means that you are thorough, efficient, systematic, hardworking, reliable and have the desire to perform your tasks well.
Having these traits is an obvious plus for your career and as it turns out, another important part of your life as well.
Meir Statman had an article in the Financial Analysts Journal in which he described how conscientious people don’t spend on impulse or buy things they don’t really need. This makes them better savers along with the fact that they tend to accumulate more wealth than those who are not conscientious even after accounting for differences in income, education and cognitive ability.
Since all people are different, there are going to be many of us that aren’t conscientious and therefore aren’t adept at saving and planning for the future.
This could help explain why, according to an EBRI survey, 30% of US workers have less than $1,000 in savings and investments, while 3 out of 4 have less than $30,000 in retirement accounts. And 28% have absolutely zero confidence that they will have enough money saved to retire.
SO WHAT’S THE SOLUTION?
I think one of the ways to make big changes in our savings habits is to educate people on financial literacy. Some people claim that at this point we should all know the steps we have to take to save, invest and live within our means.
But there are still people out there that don’t understand the big picture just yet. A recent Wells Fargo survey showed that only 1 in 3 millennials (ages 22-32) who have begun to save say “they realized that starting early can result in a bigger nest age down the road.”
So even though they are saving they don’t even know the benefits of why they are actually doing it (compound interest, good behavioral habits, etc.). Most are simply saving because their employer offers a 401(k) plan. Without having the basic understanding of why you have to save it is very easy to give up on that part of your finances when life gets in the way.
WHAT IF THAT DOESN’T WORK
But even if we do increase awareness on the need to save and invest for the future, there will still be those people that are not conscientious and need help changing their behavior. And behavior is what it really boils down to in most cases.
People just seem to have a hard time changing how they act and our behavioral biases cause us to constantly make mistakes that hurt us in the long run. These can be very hard to fix.
That’s why the automation of our financial and saving decisions is so important. This makes it easier to take the minor decisions out of your hands so you don’t even have to be conscientious, it just happens automatically.
But Statman would like to take this a step further and make saving for retirement mandatory. He thinks that the situation is so dire that we need to take corrective action to force people to plan ahead.
This idea is actually not all that far out of the realm of possibility. He outlines in his article that Australia has a mandatory plan that requires employers to contribute 9% of employee earnings to a mandatory defined contribution retirement plan. And that amount will slowly increase to 12% of salary over the next seven years or so.
Israel and the U.K. have set up similar programs to ensure that their citizens are savings enough for life after the workplace.
Statman goes on to lay out his ideas for how such a plan could be set up for American workers. Here are the main points that are outlined in the article:
- Combined mandatory contributions by employers and employees at a minimum of 12% of salary (equal to Australia’s target).
- To be administered by 401(k) providers.
- Default investment options would be well-diversified target date funds.
- Fees of no more than 30 basis points (0.30%).
- No borrowing from retirement savings accounts before retirement age (I like this one).
- Enhanced financial literacy through education at high schools and elsewhere (this one is important as well).
I generally don’t think that people should be forced into doing anything that they don’t want to do (assuming it’s not a law of some sort). But in this case I can see the need for an exception. Too many people are far too unprepared (not conscientious enough?) for their financial future.
If you think about it, this would be no different than the money taken out of our paychecks for taxes, social security and Medicare.
A program like this would have to be rolled out in phases over a number of years to eventually get to the 12% mark. This would ease the pain but having employers pitch in for some of the savings would take some of the sting out of it for those saving absolutely nothing at the moment.
It would be great if everyone was willing and able to save for their retirement on their own. Obviously, the statistics prove that this isn’t been the case.
In China, where per capita income is much lower than the US, they have a personal savings rate of more than 50%. The latest reading from the Federal Reserve shows that the US has a personal savings rate of under 3%.
There are cultural, economic and standard of living differences that account for some of this gap but the point is that we need to make saving a much higher priority than it is currently.
I think financial education can help. But changing ingrained behavior is difficult. For those that don’t have the correct personality traits needed to better prepare themselves for retirement, a mandatory savings program might be our only hope.
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