Jar of cash on the table for retirement savings

The Secret Ingredient to a Happy Retirement: Patience

Why don't people save enough for retirement? Instant gratification wins.

Jar of cash on the table for retirement savings

We aren't wired to think long-term, but we need to if we're going to save for retirement.

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Many great discoveries come about by accident, like the discovery of the anti-malarial drug quinine, the smallpox vaccination, X-rays and insulin.

Here’s a discovery that relates to retirement: the unexpected importance of marshmallows in explaining the difficulty of delaying gratification. A famous Stanford study by Walter Mischel, which took place in the late 60s and early 70s, involved offering young children a selection of tasty treats, including marshmallows, cookies and pretzels. When they selected one, they were told they could eat one immediately, or two if they waited a short period while the researcher left the room and then returned. They were given the option to summon the researcher immediately by ringing a bell, but if they did so, they would get only one treat instead of two. These experiments were conducted over several years.

Only about 30 percent of the children were able to delay gratification until the researcher returned 15 minutes later.

Follow-up studies yielded fascinating results from this simple study. Low delayers (who rang the bell the quickest) seemed more likely to have behavioral problems, had more trouble dealing with stress and had fewer friends. Although these findings may seem subjective, some of the data is precise. On average, those who were able to delay gratification for a full 15 minutes scored 210 points higher on their SAT scores than low delayers.

Planning for a successful retirement has never been more challenging. The good news is that life expectancy is increasing. Americans who reach age 65 can anticipate living for another 19 years, according to a 2013 Centers for Disease Control and Prevention estimate. The bad news is many of them are at risk of running out of money. According to a 2011 University of California at Berkeley study, “Californians’ Retirement Prospects Grim,” almost half of Californians are likely to retire in or near poverty. The Schwartz Center for Economic Policy Analysis found that three-quarters of Americans between the ages of 50 and 64 had saved less than $30,000, as of November 2010.

There’s a fancy term to describe our inability to plan for the future. It’s called “temporal discounting.” It refers to the practice (familiar to most people) of discounting the value of future benefits, compared with rewards immediately available. It’s not that we don’t understand the benefit of regular saving and planning for retirement. It’s that we often elect for immediate gratification, even though we know this choice is harmful to our long-term interest. In short, we are low delayers.

The financial planning industry largely ignores the effects of temporal discounting. Instead, it inundates you with exhaustive information about savings rates, the value of compounding, calculations to determine if you will run out of money and withdrawal rates. Although helpful and informative, this approach misses the point and doesn’t deal with the core issue. Americans are not planning for retirement because they don’t understand the benefit of doing so. They are opting for immediate gratification.

Francesca Gino, social scientist and associate professor at Harvard Business School, praised changing the default option for retirement plans to automatically enroll employees and require them to affirmatively opt-out, as certain psychological barriers prevent people from making the choice themselves. This has the desired effect of forced savings, Gino explained on Prudential's website.

A more aggressive approach favored by Gino is a program that automatically increases contributions to employees’ retirement plan every year, as their salaries increase. As a result, savings increase, without affecting take-home pay.

Technology now offers intriguing ways to deal with temporal discounting. In one 2008 study, “Saving for future self: Neural measures of future self-continuity predict temporal discounting,” participants are shown computer-generated images of themselves at their current age and then age-morphed versions of how they would look at retirement. This exercise causes them to indicate they would save more for retirement.

An article in Scientific American, “Eat, Lust, Pay: How to Gain More Self-Control,” offers some helpful suggestions for planning for the future:

  • When confronted with an impulse buy, delay making a decision. Give yourself time to reconsider.
  • Visualize the consequences of running up debt.
  • Listen to classical music while shopping. It will make you more reflective.
  • Visualize yourself as older and possibly dependent.

Unfortunately, research indicates the way our brain perceives our present and future selves may cause us to devalue future rewards. Our perception of our present self differs markedly from the way we view our future self.

It turns out that planning for retirement is much more complex than not eating a marshmallow.