Put retirement on auto-pilot

Written by Gary Silverman, CFP®

If you are a regular reader of this column you know that a myriad of studies have shown that people haven’t, aren’t, and probably aren’t going to save enough to fund the retirement they expect to have. That’s a problem—and one I’ve tried to solve through education and counseling. But I know that’s not enough.

First, most people aren’t as privileged as you who read this wonderful column weekly for expert personal finance, retirement planning, and investing advice. Second, even if they were, most wouldn’t act on what they read. Behavioral finance (yes, that’s an area of study) has shown that most humans aren’t wired right to do this personal finance stuff correctly. We have all sorts of biases and really hate that delayed gratification thing.

In one study they even ran CAT scans on people when they were thinking of their current self versus their future self. The thoughts of now were done in a completely different part of the brain than the thoughts about the future. Those thoughts about our self in the future occur in the same place in the brain where you process thoughts about a stranger. In other words, our future self is a stranger to us.

That explains, in part, why we have a hard time taking away from our spending today to save for a retirement in the future. If we’re gonna spend money on someone, a stranger, and apparently our future, are both lower on the totem pole than the self we know and love. That’s why I think we need to change how we do retirement savings.

First, I’d like every employer to have a retirement “plan” available to their employees. Bigger ones will have things like the 401(k) that most do now. Smaller companies could have something akin to the SIMPLE IRA, but even simpler. Really, I don’t want the company to have to do anything other than deduct money from a paycheck and send it somewhere…similar to what they do now with Federal income tax withholding and Social Security.

Next, I want this to be automatic for the employee. A percentage of their pay will go into the plan. I’m thinking about 5%(10% would be better, but let’s not push it). As the amount contributed will be tied to their pay, it will inflate as they get raises.

Once there, it would be invested in an appropriate target-date fund. A target-date fund will help keep them from being too conservative when they are young or too aggressive as they enter retirement age. The employee would be able to change any of this and have the right to completely opt-out (what I call the “right to be stupid”).

None of these are new ideas, and several have been proposed in Washington. The important points are that they need to be available to most workers, be easy for the employer to administer, be as automatic as practical, and allow the employee to take control should they choose to.Our brains need the help.

This article was published in the Times Record News "Your Money" column on July 19, 2015.