Misunderstanding Savings Growth Implications for retirement - - PowerPoint PPT Presentation
Misunderstanding Savings Growth Implications for retirement savings behavior Craig R. M. McKenzie Michael J. Liersch UC San Diego NYU Rady School of Management Stern School of Business & Department of Psychology Background Rapid
Michael J. Liersch UC San Diego NYU Rady School of Management Stern School of Business & Department of Psychology
Rapid change in US
Responsibility of saving for
Reason to believe that
Traditional accounts of insufficient saving (e.g.,
We show that undergraduates fail to appreciate the
Other research has shown that exponential growth is
We test interventions to help increase savings
Assume that you deposit $400 [$200] every month into a retirement savings account that earns a 10% [5%] yearly rate of interest. (You never withdraw any money.) How much money do you think you will have in your account (including interest earned): After 10 years? $_____ After 20 years? $_____ After 30 years? $_____ After 40 years? $_____
2 conditions (N = 99; undergraduates): Aid (calculator provided)
We requested participants’ calculated answer
No Aid (no calculator provided)
We requested participants’ best guess
Imagine that you deposit $100 every month into an account that earns 10% interest, compounded annually. You never withdraw any
your account will increase over 40 years? Please place a mark next to one chart. Chart A years: 0 years 10 years 20 years 30 years 40 years $: $0 $21,037 $75,603 $217,132 $584,222 Chart B years: 0 years 10 years 20 years 30 years 40 years $: $0 $146,056 $292,111 $438,167 $584,22
78% 22%
Imagine that you deposit $100 every month into an account that earns 10% interest, compounded annually. You never withdraw any
your account will increase over 40 years? Please place a mark next to one chart. Chart A years: 0 years 10 years 20 years 30 years 40 years $: $0 $21,037 $75,603 $217,132 $584,222 Chart B years: 0 years 10 years 20 years 30 years 40 years $: $0 $13,200 $26,400 $39,600 $52,800
50% 50%
Imagine that both ALAN and BILL just started working and are going to retire in 40 years
ALAN deposits $100 every month into his retirement account BILL waits 20 years to start saving, but then deposits $300 every month into his
retirement account
Both accounts earn 5% [10%] interest every year, compounded annually. Neither of them withdraws any money.
Annual Return Actual: Who has more money? Participants: Who has more money? Actual: How much does Bill need to save to catch up? Participants: How much does Bill need to save to catch up? (median) 5% Alan ($152k vs. $125k) 36% correctly chose Alan $365/mo $200/mo (45% of responses) 10% Alan ($584k vs. $227k) 30% correctly chose Alan $773/mo $200/mo (52% of responses)
(N=276)
Sample questions: If you deposited $100 each month, about how much money would you have after 20 [40] years? $ __________
Sample questions: If you deposited $100 [$200] each month, about how much money would you have after 20 years? $ __________
S’s turned in first part of survey, answered additional questions
Study Participants 250 N 37 Mean Age (years) 47 Female (%) 7 Mean Tenure (years) 3 Mean Deferral Rate (%) 28,627 Mean Total Balance ($) 37,048 Estimated Annual Salary ($)
Using the S’s actual 401(k) data, they saw either their current account balance or their estimated future account balance at retirement E.g., 30-yr-old S depositing $4k/yr with $40k would see either $40k current balance or future estimated balance of over $500k
Dollar amount viewed by participants Less Interested Equally Interested More Interested Total account balance (Control) 8% 65% 27% Estimated account balance at retirement (Intervention) 9% 50% 41%
Participants believe savings grow linearly, leading to
S’s don’t even reliably recognize correct pattern
This leads to underestimating cost of waiting to save
Understanding compound interest doesn’t help
Interventions highlighting exponential growth of savings
For both undergraduates and real employees Intervention mentions nothing about compound interest, what