Can Procrastination Enhance Retirement?

When it comes to committing to save more for retirement, procrastination may not be such a bad strategy. Let me explain. The traditional advice for those looking to build up their retirement accounts has been to review current expenses, create a budget that reduces spending, and direct those dollars into tax-advantaged savings plans like 401(k)s or IRAs. Yet research from Shlomo Benartzi and Richard Thaler (the authors of the very interesting behavioral finance book, Nudge: Improving Decisions About Health, Wealth, and Happiness, which explores how we can make better choices) suggests that rather than push people to dramatically reduce their current spending, it may be more effective to simply ask them to agree to save more tomorrow. That’s revolutionary.

Specifically, rather than getting employees to boost their 401(k) savings immediately, the researchers have been successful helping employees to build their retirement accounts by getting them to agree to direct most of next year’s raise to their 401(k). Apparently, doing without future dollars is less painful than having to forgo the daily latte, evenings out, or a gym membership.

The researchers refer to their strategy as the Save More Tomorrow (SMarT) Program. Amazingly, when retirement plan participants were asked to increase their savings rate next year by 3% (assuming their raise was at least 3%), Benartzi and Thaler found that 78% of employees agreed! Contrast that with the 28% who agreed to save more right away!

Even more impressive is the fact that of the employees who agreed to save 3% more for retirement next year, only 2% failed to follow through with their pledge. And, over time, those increased annual contributions add up. After four years, the researchers report that the SMartT program helped employees agreeing to put off until tomorrow what they could do today to increase their average savings rate from 3.5% to 13.6%. Employees that didn’t participate in the SMartT program managed an average increase from 4.4% to 8.8%.

I’m not one to encourage anyone to procrastinate, but it’s tough to argue with success like that! What do you think? Would you rather save more tomorrow or cut your expenses to save more today?

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