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Why Is Saving For Retirement So Difficult?

Why is saving for retirement so hard? For many of us, it’s much more appealing to spend today than to save for tomorrow. It’s human nature – we live in the present. Often the choices we make aren’t necessarily in our best interest in the long run (examples include smoking, indulging in a poor diet or giving in to spending for immediate gratification versus saving for retirement.) Why?

A famous study conducted by Stanford psychologist, Walter Mischel in the early 70’s, known as the Marshmallow Experiment, demonstrates the prevalence of this innate tendency. Over 600 kids ages four to six were offered a choice: get a marshmallow now, which they could eat right away, or wait about 15 minutes for the researcher to return and give them an additional marshmallow. Two treats versus one; a reward now or more reward in the “future.”

Not surprisingly, only about 1/3 of the children were able to delay gratification in order to receive a second treat. Years later, evaluation of this group as teens and young adults showed greater levels of social competence, confidence, stress management and ability to plan ahead than their less patient peers.

Saving for Retirement and Your Brain

Neuroscience actually provides some physical context for this phenomenon. Jason Sweig, in Your Money & Your Brain, explains that long term planning occurs in the analytical areas, or “reflective brain. Sweig cites a Princeton study reminiscent of the Marshmallow Experiment. Participants were offered a choice between a small reward now versus a larger one a month from now. The reflective brain is activated when considering the options. Choosing the immediate reward, however, activates the reflexive brain. Of particular interest is that going for the short-term reward released a kick of dopamine – a feel good chemical. Dopamine was not released when subjects chose the delayed but larger reward. There really does appear to be a hard-wired component in this decision-making process.

Framing the “How to Save” Question

Another way to understand the difficulty of saving for the future versus spending in the present is illustrated by the results of the following survey (reported by Gary Belsky & Thomas Gilovich in Why Smart People Make Big Money Mistakes.) Participants were divided into two groups. One group was asked whether they thought they could save 20% of their income. The other group was asked whether they thought they could live on 80% of what they make. The two questions are essentially the same, but with a different emphasis. However, the difference in answers was striking. Only 50% of the first group said they could save 20% of their income. But 80% of the second group said they could live off of 80% of their income. What accounts for the wide discrepancy in the responses between the two groups?

It turns out the difference arises from the way the questions were framed and perceived. In the first group, people were asked if they could save 20% of their income. They viewed saving as having to give up something. In fact, that’s true. They would forgo current consumption in favor of having more to spend in the future. The second group, asked if they could envision living on 80% of their income, saw saving as a question of making do with slightly less than they had previously. Seeing the glass as “half full” in this instance, more of them responded positively.

In next month’s article, we’ll explore some strategies for solving the conflict between spending in the present versus saving for the future.

Check out this video on the Marshmallow Experiment:

2 thoughts on “Why Is Saving For Retirement So Difficult?”

  1. I enjoyed your article, Jeff! Great research and I laughed watching the video. So funny watching those kids TRY so hard to wait. Even picking at the marshmellow to taste just a little. ha! Too funny! We can all relate to this one! Well done!

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