Photo: Orin Zebest on flickr
Americans everywhere are underestimating how much they’re saving for retirement.A recent report from the National Bureau of Economic Research found that people will dramatically increase the amount they sock away if you simply explain to them how much their current savings will be worth.
Using a test group from the University of Minnesota, researchers used a formula to show how much would be in their account if they saved a certain amount per year. The result was an $1,150 per-person yearly increase among those who decided to change contributions.
The share of Americans with traditional pension plans has plummeted, meaning that more employees have to choose how much to contribute, according to the study:
Among Americans with pensions, the share with only a traditional defined benefit pension fell from 60 to 10 per cent between 1980 and 2003. Over the same period, the share with only a DC plan rose from 17 to 62 per cent (Buessing and Soto 2006). Because individuals only have one shot at saving for retirement, the stakes are high and the consequences of suboptimal choices for financial well-being are potentially large.
With Esquire reporting last week that only 58 per cent of Boomers have more than $25,000 set away for retirement, the U.S. had better start educating people.