To better understand how people make retirement savings decisions, Goldman Sachs Asset Management (GSAM) recently collaborated with behavioral finance research firm Syntoniq to evaluate the factors that may influence Americans’ retirement savings tendencies.
In the resulting analysis, released as a supplement to the firm’s Retirement Survey & Insights Report 2023, GSAM reveals that those with greater ease in preparing for retirement show four “optimal” behavioral traits: high optimism, high future orientation, high financial literacy and having a reward orientation, rather than a risk-orientation.
Individuals assessed as having high levels of these four traits reported more retirement savings, less stress when managing savings, more comfort managing competing priorities and a higher level of engagement, for example, by setting up personalized financial plans and changing investments in volatile markets, compared to those assessed as having low levels of these four traits.
That said, only 10% of working respondents exhibit all four “optimal” traits, while 5% exhibit all four reciprocal or “suboptimal” traits—low optimism, low future orientation, low financial literacy, and risk focus. The vast majority (85%) possess a blend of these traits and report mixed success in saving for retirement.
“These results demonstrate that possessing certain ‘optimal’ traits can help people navigate the Financial Vortex of competing priorities that all too often interfere with retirement success,” said Chris Ceder, Senior Retirement Strategist with Goldman Sachs Asset Management.
“The analysis suggests that people who are positive about their future may sacrifice for it in the present, establishing budgets, living below their means, and prioritizing long-term savings, while those who are primarily focused on their current quality of life may struggle with allocating to longer-term savings needs.”
Higher Optimism = Higher Retirement Savings
When it comes to levels of retirement savings, high optimism correlated most among survey respondents with reported higher retirement savings. Highly optimistic respondents are more likely to report that their retirement savings are on track or ahead of schedule (83%), compared to 41% with low optimism.
Those with high future orientation answered similarly—73% reported that their retirement savings are on track or ahead of schedule vs. 50% with low future orientation. Of those who are low in both traits, less than a third (31%) reported that their retirement savings are on track or ahead of schedule.
Perhaps not surprisingly, having a personalized retirement plan is more common for those with high optimism (78% v. 42% with low optimism), reward focus (65% v. 55% with risk or prevention focus), and high future orientation (70% v. 48% with low future orientation). A personalized retirement plan is also particularly prevalent among those with both high optimism and high future orientation (83%) and less common among people with both low optimism and low future orientation (33%).
Financial Literacy Impact
Financial literacy reflects a level of understanding of basic financial concepts, such as compound interest, inflation and diversification. Those with high financial literacy report that they regularly review their retirement savings, have substantial emergency savings, and keep spending in check.
Among survey respondents, higher financial literacy was more prevalent in older people, those with partners, a higher amount of household assets, and higher levels of education.
Income Generation Preferences
Behaviors also play a role in retirement income generations. Those with high financial literacy reported preferring guaranteed, consistent, inflation-protected income from diversified sources, while less financially literate respondents reported favoring retirement income from a single source.
Guaranteed income generally is most desired by those who report struggling to save adequately. Those with a risk focus prefer guaranteed income and professional financial advice, the study further notes.
Implications for DC Plan Design
The study suggests that incorporating behavioral insights into the retirement planning process can add a new dimension of personalization and can help better align plan design (i.e., products and services) with behavioral preferences.
As such, plan sponsors and financial advisers may wish to consider the potential benefits of behavioral mindset as an aspect of personalization. The survey shows it may be helpful to recognize employees’ behavioral factors and educate employees to avoid their potential behavioral pitfalls.
“Promoting optimism and future orientation may be important to encourage a savings mentality,” notes Ceder. “Educational initiatives, communication campaigns and expanded services that promote our future selves may engage workers in their retirement mindset.”
“With all the financial information available, people can be overwhelmed by retirement planning. Personalized tools and education can cut through the clutter and help people focus on the decisions that matter,” the senior retirement strategist further emphasized.
The analysis and related findings discussed are based on a July 2023 survey of 5,261 U.S. workers (3,673) and retirees (1,588) conducted by GSAM and Qualtrics Experience Management.
Retirement Mindset Matters Report
