Why Most People Delay Saving for Retirement
It should be common knowledge that we need to save and invest money now to be able to retire in the future, yet according to a study by the Employee Benefit Research Institute, only “40 percent of workers indicate they or their spouse currently have a defined benefit plan."
This is particularly alarming considering that we are living longer and thus spending many more years in our retirement.
Why don't we save enough for retirement?
It's estimated that 71% of Americans are not saving enough for retirement and to make matters worse, more people are entering retirement with a greater amount of debt than ever.
According to a study done by Experian, 71% of people were not invested in the stock market and 41% of people had no future plan to invest because of reported lack of funds.
These numbers reflect the high amount of uncertainty and fear people have of investing in the stock market.
Financial experts predict we are going into a retirement savings crisis.
What keeps us from investing our money now for the future?
Frequently, people assume that investing is too difficult, without ever trying it. When we assume something is too difficult, we disregard or avoid it because the thought alone is overwhelming.
Saving for something that is not immediate and abstract can also be difficult. Putting a percentage aside versus trying to reach a set number goal can make it difficult to stay motivated. We are more likely to avoid or procrastinate these goals.
With each life stage, we also focus on more immediate goals.
Young adults typically focus on paying their student loans and saving for a home. In their 40's, they start to focus on saving for their children's education and paying off their mortgage.
These immediate debts may seem more important to focus on than retirement, especially if the belief is that by paying off debt there will be enough money to save and retire with.
The issue with this is in not understanding the concept of the compound effect. Compounding is when earnings generate earnings and through time, this keeps multiplying. Therefore, the earlier you start, the more earnings you will gain compared to those who start later even if those starting later are putting in more money than what you initially started with.
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
Not understanding how compounding works leads people to underestimate how much money they will have over time. This inability to accurately predict how much money they will have after retirement influences people to start saving later because they are not as motivated to get started.
In other words, believing they will be able to save less money than they actually will over time discourages them from starting as soon as possible. Research states this happens because people are not good at estimating non-linear outcomes; they believe their money will grow in a linear process over time and therefore underestimate actual growth.
Optimism also contributes to a delay in retirement investing. It influences people to believe they will save enough money in the future even if they are not taking the steps to make that possible. This is also driven by the belief that income will significantly increase over time and they will have more money to save then.
To summarize, what keeps people from investing early for their retirement is not having a clear and specific goal, prioritizing other more immediate financial goals, not understanding the power of compound interest, and being optimistic about how much money they will be able to save in the future.