Saving For the ‘Future You’

Future YouA new report from Mercer and Stanford University’s Center on Longevity finds that when it comes to encouraging folks to save more for retirement, one picture can be worth far more than 1,000 words in a retirement brochure—”picture” referring specifically to age-enhanced photos of the participants. The report’s authors note that getting retirement-plan participants to making an “emotional connection” with their future selves can be an effective way to improve savings behavior. They found that people who saw an age-enhanced photo of themselves were willing to put an average of 6.8 percent of their pay into their 401(k) plans. Participants in a control group who were not shown such photos were willing to contribute an average of only 5.2 percent of their pay.

The importance of participating in a defined-contribution plan is underlined by a new study from the Employee Benefits Research Institute, which finds that the current levels of Social Security, coupled with at least 30 years of participating in a 401(k) plan, could provide most workers with at least 60 percent of their pre-retirement pay on an inflation-adjusted basis. Between 83 to 86 percent of workers should be able to replace 60 percent of their age-64 pre-retirement wages and salary with these sources, EBRI found, while 73 to 76 percent of workers should be able to replace 70 percent of their pre-retirement income. (Most retirement experts say a person needs to be able to replace between 70 percent and 80 percent of their final salary for an adequate retirement.)

These findings underscore the importance of Social Security income during retirement—especially for lower-income workers, says EBRI research director Jack VanDerhei:

“If, for example, we assume that a proportional 24-percent reduction would be applied to Social Security retirement benefits for all simulated workers, the percentage of the lowest-income quartile under voluntary enrollment 401(k) plans with an 80 percent replacement threshold drops 17 percentage points, from 67 percent to 50 percent, while the highest-income quartile —which receives less proportionate benefits from Social Security—drops by only 9 percentage points, from 59 percent to 50 percent.”