This One Thing Will Help You Save More for Retirement

NEW YORK (MainStreet) — Americans struggle to save enough for retirement, even though they are advised, warned and begged by financial consultants, employers and family to invest for life after work. But researchers at the Stanford think they have found the answer: retirement income projections.

"The findings suggest that people are not perfectly informed about the link between saving today and income in retirement," says economist Gopi Shah Goda, a senior research scholar at the Stanford Institute for Economic Policy Research. "Also, many overestimate the level of retirement income that current saving generates."

The large-scale field experiment included two groups: one was provided with customized brochures containing detailed information about how contributions to retirement savings accounts could specifically translate into income in retirement. The other group was provided generic retirement savings information.

The researchers found that providing retirement income projections -- along with general retirement planning information -- compels individuals to increase their savings for retirement.

Even though the difference was incremental, it was still statistically significant.

"Many Americans must make choices about their retirement saving while faced with uncertainty about future rates of investment return, inflation, health status, income and other factors, and about how current contributions will translate into retirement income," Goda says. "We found that this low-cost intervention had a modest but statistically significant effect on retirement saving, increasing contributions by approximately 0.15% of income on average."

When the information regarding the direct link between savings and retirement income is excluded, people save less, the study suggests. The research also found that many people overestimate the level of income needed in retirement, projecting future savings with little or no interest being earned.

Though the research indicates the power of income projections in motivating retirement savings, the key is to keep the information simple and understandable.

"Many studies have shown that financial literacy is low and that many people struggle with basic financial concepts," Goda says. "Projecting retirement income requires complex calculations and several assumptions that can be challenging for even the financially sophisticated."