Do you need motivation to help you
save for retirement? Here's a suggestion: try living for a month on
nothing but your projected Social Security check.
The reason this might work lies within the human brain. There's a big
difference between what we know and what we do. Most of us intellectually
"understand" that someday we'll be unable to work and will need
to survive on an income based on what we "did" rather than what
we "do." Most of us "understand" that Social
Security and welfare programs provide for only a Spartan existence.
Yet, 68% of Americans say they haven't saved enough for retirement and
struggle to change this self-destructive behavior. And that's just the
ones willing to admit the truth.
Researchers have long searched for a psychological explanation as to why
humans often behave so irrationally. What we know is that saving for
retirement is similar to exercising, dieting, or quitting smoking. All
these activities offer future benefits rather than immediate
gratification. Such a value proposition doesn’t sell well to the human
brain, which is wired for "now."
There is some evidence that humans act more rationally when decisions are
in the future. One study gave participants the option to wait 100 days to
receive $100 or wait 101 days and receive $101. Most participants would
wait the one extra day for the extra buck, which actually represented an
annualized return of 350%. But when given the option to take $100 now or
wait until tomorrow and receive $101, the majority took the money now,
clearly an irrational financial decision.
The study of behavioral finance calls this "hyperbolic
discounting," where people place a lower value on future benefits
and overvalue the present. This tendency is exceptionally problematic
when it comes to saving for future goals like retirement. We tend to
over-consume and under-save until retirement becomes a present reality.
By then, of course, it’s too late.
In the past, finance professionals have criticized those who behave
irrationally as being "lazy," "ignorant," or
"undisciplined." While certainly a person who is not saving for
retirement exhibits a lack of self-control, the reason may be in the
construction and evolution of the human brain rather than a willful
defiance of rationality.
Our brain consists of an older brain, the limbic system, which is
overlaid by a newer brain, the cerebral cortex. The limbic system is the
source of emotional decision-making, while the newer brain processes
reasoning and conceptual thinking.
The emotional processing of the limbic system involves measuring and
assessing risk. In a study called Pension Design and Structure,
Mitchel and Utkus found two components of risk: "Dread risk,"
which is the potential for catastrophe, and "Uncertainty risk,"
which is a generalized fear of the unknown. When most people consider
retirement, neither of these fears is likely to be strongly
Researchers tell us 80% of all decisions are made emotionally, in the
limbic brain. In order for us to take action and save for retirement,
both brains need to become involved in the decision process. We must
crank up the limbic system's sense of risk by bringing the consequences
of retiring without enough money from the future into the
One way to do this is to make out a budget using only Social Security and
any pension income. I find most people resist this exercise in the same
manner they resist saving. Some researchers suggest actually living for
one month on Social Security income. Experiencing life on an inadequate
income could be enough to activate the limbic system’s fear response and
convince our brains that saving for retirement is an action well worth
Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!