Are you a born retirement saver?
Interesting argument for nature rather than nurture when it comes to saving for retirement. From MarketWatch, April 2, 2013:
Yes—if you exercise, eat healthy and read labels
By Robert Powell, MarketWatch
Are some people born to save and others not? Is it nature or is it nurture? Well, a new study on this age-old debate suggests that—at least when it comes to saving for retirement—it’s more nature than nurture. You are either hard wired to save or not.
Now this isn’t to say that those who aren’t born to save are doomed to a life of only instant gratification and long-term poverty. It’s just that those folks are the ones for whom—though there are some repercussions—automatic enrollment and automatic escalation plans were designed. More on that in a bit (if you can defer gratification) and more about the study, which was published in the Journal of Economic Behavior and Organization, right now.
“The idea of the paper is that we know the most important moment that predicts retirement success is when an employee first gets a job,” said Michael Finke, a professor at Texas Tech University and co-author of the paper. “That’s because they tend to either opt in or opt out of 401(k) savings at the benefits office.”
For the study, Finke and his co-author Sandra Huston, an associate professor at Texas Tech University, asked about 8,000 college students how important they felt it was to begin saving in their first job. “We wanted to know whether some people are born to save—whether they tend to value the future more than others and whether retirement saving correlated with other future-oriented behaviors such as seat belt use, smoking, drinking, drug use, eating healthy, unprotected sex, and exercise.”
And what Finke and Huston found is this: “Retirement saving correlated with all forward-thinking behaviors, but most strongly with health behaviors such as eating a healthy diet, using nutrition labels, and exercising,” he said. “It correlated less strongly with behaviors associated with sensation seeking and more with behaviors related to health. So that may be why healthy retirees are also more wealthy.”
Finke and Huston also found that health behaviors were a stronger predictor of the value of retirement saving than anything else in their model, including being a business major, age, being in grad school, GPA, taking a financial planning course, gender or race.”
In an interview, Finke said the idea behind his research goes back to a famous study of time preference from the 1960s in which children were given a marshmallow and told they could get a second marshmallow if they could wait 10 minutes before eating the first marshmallow. Well, as it turned out, some children, the born savers, were able to wait and some, the born spenders, could not defer gratification.
“Some kids would not have the ability to resist temptation and they would eat the marshmallow,” said Finke. “And other kids worked really hard to resist this temptation. And they made it the whole 10 minutes and they got the second marshmallow.”
The researchers then followed the children from the study throughout their lives and found that their tendency to defer gratification, to value the future more, had a strong impact on future outcomes.
In his research, Finke wanted to learn whether college students who have a present-time orientation—the ones who would have eaten the marshmallow—will save for retirement or not after they get their first job.
“Now it’s very important, that first day on the job, when you go to the benefits office whether or not you decide to save money from your paycheck every month for retirement or whether you decide to put it off—that may be the single most important decision when it comes to retirement success later on in life,” he said. “Because what we know is that a lot of people, when they don’t decide to save for retirement, they never get around to it. And the ones who do go ahead and have money withdrawn every month from their paycheck after a while they just get used to the size of that paycheck and they just continue to save for the rest of their lives.”
In his study, Finke sought to identify which college students—the so-called two-marshmallow students or the one-marshmallow students—had the intention of saving for retirement in their first job. “In reality there is a strong correlation between intention to save for retirement and actually getting out of college and doing it,” he said.
And what Finke found is that students who value the future, those who have a healthy diet, read nutrition labels, and exercise, are more likely to save for retirement than students who don’t have a healthy diet, read nutrition labels and exercises. “That was the single strongest predictor of the likelihood that they were going to save for retirement,” Finke said “In fact, It was more strong than whether they had taken a personal finance class or were a business major, even whether they were a graduate student. The single strongest predictor was this factor of those three health behaviors. It does seem that people who are very forward thinking are the ones who are more likely to save for retirement.”
For the record, Finke’s research doesn’t show whether the born-to-save college students do in fact save for retirement and the instant gratification college students don’t. To do that, he would have to conduct a longitudinal study and follow the college students in his study over the course of their lives.
Savings is a function of time preference
But the policy implications are clear, said Finke. One reason why there may be such a wide variation in the amount of retirement savings in the U.S. isn’t because people are doing the wrong thing, he said. “It’s because they are doing what makes them the happiest,” Finke said. “They are spending more now but they will have less money available for retirement.”
Finke noted that a force annuitization program such as Social Security forces everybody to save for retirement, even those people who don’t value retirement all that much. “When you leave it up to individuals, because there is so much variation in how individuals want to live in retirement, you are going to see more variation in how much they’ve saved in their retirement accounts.”
It is, of course, easy to suggest that those people who value the present more than the future, who don’t read nutrition labels and exercise are doomed to a life of poverty later in life. “Our phrase would be that they are doomed because we value that,” Finke said. “To us, retirement planning is very important. But to them, this whole thing about automatic enrollment, is forcing them to do something that may not be what they want to do.”
And that, he said, raises all sorts of questions about government policy. “If you have a group of people who don’t value saving all that much and you force them to save a lot does that make them better off or worse off?”
Automatic enrollments might make non-savers unhappy
According to Finke, automatic enrollment plans might make some individuals unhappy in the present but better off later in life when they have enough money to support a desired standard of living. “They probably are not going to regret having more money by the time they hit age 70, but they aren’t going to live quite as well today,’ he said. “And that is the trade off of saving for retirement. You don’t live as well early in life so that you can live better later in life.”
Help for those not born to save
At the moment, there are no tests you can take to learn whether you are born to save or not. But if you are the sort of person who has healthy habits, you are more likely to born to save for retirement than not. “If not, you are probably the kind of person…who might need to have some more handcuffs that prevents you from making mistakes in the short run,” Finke said.
So, if you’re not born to save, Finke suggests that you consider not opting out of automatic enrollment or automatic escalation plans at work, and that you avoid raiding your 401(k)s or IRAs. “Make that off bounds or even set up barriers to being able to do that,” he said. “Maybe hold less liquidity if you tend to be that kind of person because liquidity means that you have a lot of temptation to spend it. And if you know that you have some problem with that than create an account that is a more difficult to access if you are tempted to spend a lot of money.”
Finke also said society ought not judge those who aren’t born to save. “In a lot of case it might be more difficult for them to save than it is for the rest of us,” he said.
But he did suggest that those who aren’t born to save consider doing what Odysseus did to avoid the Sirens: Tie yourself to a mast to avoid the temptation to spend only in the present.
Robert Powell is editor of Retirement Weekly, published by MarketWatch. Learn more about Retirement Weekly here. Follow his tweets at RJPIII. Got questions about retirement? Get answers. Email firstname.lastname@example.org.
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