The psychological tricks that could make you richer in retirement

Linda J. Dodson

I was invited this week to take part in a “behavioural science experiment”. It sounded like the stuff of horrors but turned out merely to be a short test about my attitude to pension saving.

I put away 15pc of my salary, helped by a generous matched contribution from my employer. This puts me in the minority among my age group (you’ll forgive me if I squeeze myself into the 20-29 bracket despite having graduated from this tier last year). 

In a poll, one in three in this age group said they hadn’t thought about the role a private pension would play in their post-work life. One in five said they hadn’t thought of saving into a pension at all. Just one in 10 said they felt they were already saving enough.

So how can young people be encouraged to start building their retirement pots? That’s what pension firm Scottish Widows, helped by the Behavioural Insights Team (formerly the Government’s “Nudge Unit”), set out to understand. I, along with 2,800 others my age (oh, be quiet), was given the hypothetical case of “Alex”, a 25-year-old with average income and default contributions.

But we were shown different ways to look at the future value of Alex’s pension: one based on savings (you can save more now), one based on investing (an extra £80 now would be worth £39,440 more by retirement), one based on labelling (you need to save 15pc to be “comfortable” in retirement) and one focusing on the future (envisage how you want to spend your retirement). We were then asked: would we encourage Alex to increase her contributions? Did we feel we should increase our own? 

The results showed the labelling strategy was best when persuading others to save, the future focus method was better at making people want to increase their own contributions and the investment wording led to the highest boost in the amount people put aside, making it an effective tool for those who have already decided to save more. 

Behavioural tactics are already proven to change financial behaviour. The “Save More Tomorrow” theory from economists Shlomo Benartzi and Richard Thaler – in which participants commit now to saving more in the future, with all increases linked to pay rises so they never have less in their pocket – has helped 15 illion Americans save more.

On these shores, auto-enrolment has done a similar thing, turning 10 illion people into retirement savers. But in the Covid climate many people may find they are earning less, working part-time for multiple employers or taking the leap to self-employment. 

Those whose income from a single employer drops below £10,000 will fall out of the auto-enrolment net. Others may choose to opt out: 10pc of workers have paused their contributions since lockdown began, according to pension firm Canada Life, with another 13pc considering doing so. Even the auto-enrolled put aside just 8pc, which is unlikely to be enough for many.

As people grapple with their finances today, it is crucial that workers think not only about their current needs but about their future requirements. Hopefully, by following effective psychological nudges such as those described here, all horrors will be confined to my experience of “behavioural science experiments” and not to any unearthed shortfalls come retirement.

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