In his new book, Save More Tomorrow: Practical , Shlomo Benartzi, chief Solutions to Improve 401(k) Plans economist at Allianz Global Investors, looks at why we're letting our retirement goals slip away:
1. Loss aversion: Workers care more about what they'll lose than what they could gain by saving. Once that 10% slice of their salary is tucked away, it's untouchable -- unless they're willing to pay a pretty penny in early withdrawal fees and taxes. Loss aversion is also why we make bad investment choices even if we do sign up for a plan: For example, dividing assets 50/50 between a stock and bond plan rather than calculating exactly the best balance.
2. Inertia: This is why most workers either choose the most convenient routes -- target date funds are an obvious example – or do nothing at all.
[InvestingAnswers Feature: Find the Best Target-Date ] for Retirement
"Many workers become overwhelmed by the saving and investment decisions that go along with the process of enrolling in a plan," Benartzi writes. "These are the same people who, when asked, will say they really would like to save for their retirement, if only the could get around to it."
3. Myopia: In short, this is our inability to imagine ourselves 20, 30 and 40 years down the road, swaying somewhere on a hammock in the tropics. Without the idea of our eventual reward in the backs of our minds, we're less likely to care much about our nest egg or, more commonly, not save enough to make whatever dreams we do have a reality.
What We Can Do About It
Auto-enrollment: If employers automatically enroll all workers in retirement plans -- with theto opt-out later if they want–we wouldn't have the chance to procrastinate our retirement savings.
Face time: This sounds like something off an episode of CSI, but Benartzi and his team are working to create a tool that will actually show workers an age-adjusted image of themselves at retirement. "Studies have shown this kind of exercise can result in participants saving significantly more for retirement," he writes.