Editor’s Note: this is the second in a two-part series on what can be done to help those who about to retire or already have to better prepare to finance their retirements. Part one is here.
“There are no quick, simple solutions” in encouraging pre-retirees and retirees to make decisions that will heighten their financial readiness for retirement, caution Martha Deevy, Senior Research Scholar and Associate Director at the Stanford Center on Longevity, and Steve Vernon, a Consulting Research Scholar at the Stanford Center on Longevity, in “Disconnected: Reality vs. Perception in Retirement Planning.” They further argue that changing the situation will take “robust and sustained interventions.”
Deevy and Vernon offer a three-step plan for helping pre-retirees and retirees make effective decisions about their retirements.
1. Engage and Educate. Draw the attention of pre-retirees and retirees to how important their decisions about retirement financing are and motivate them to learn more about options available to them.
There is real potential for this effort, Deevy and Vernon indicate, noting that 75% of respondents say that providing them with educational resources would be an incentive to do more retirement planning. “Engaging and motivating pre-retirees to understand and spend the necessary time to address the various decisions they face will help them define their specific needs and desires in retirement,” they argue.
2. Guide. Provide pre-retirees and retirees with a step-by-step way to approach decisions they need to make.
There is potential here too, suggest Deevy and Vernon; they report that respondents also said that a step-by-step guide to making decisions about financing their retirements also would encourage them to do more planning. They argue that such a guide could be effective in simplifying the perceived complexity of planning for their retirement, as well as in helping them to address their particular circumstances.
3. Enable. Deevy and Vernon advocate addressing, mitigating, or outright removing barriers to making decisions about retirement financing. They further report that they found that pre-retirees and retirees might be open to messaging that would help increase their engagement. They suggest that such messaging could:
- emphasize that making informed decisions can give them peace of mind, flexibility, and control;
- connect them emotionally to the impact their decisions can have;
- carefully balance positive and risk-avoidance messages; and
- employ principles of behavioral economics and psychology.
Draw from Research
Deevy and Vernon note that “there is robust body of research from the fields of psychology and behavioral economics” that can give employers and retirement plan administrators and professionals insights into what they can do to better communicate with and motivate pre-retirees and those who already are retired to make better decisions to financially prepare for retirement. These approaches and steps include:
- Break complex decision processes into smaller, manageable steps of increasing difficulty to help build confidence.
- Use language and methods that work with—not against—individuals’ existing beliefs.
- Use loss aversion; help individuals define the loss their retirement decisions will help them to avoid.
- Tailor solutions to include specific factors appropriate to influence retirement planning.
The study Stanford commissioned also provides some practical ideas.
Messaging. Respondents told researchers that the message that planning for retirement will increase the amount of control over one’s life during retirement was especially effective. More than 75% said that message was very or extremely effective in encouraging them to better plan for their retirement. They consider the message that planning now will result in peace of mind equally convincing. Almost as many—74%—were as receptive to the idea that planning will give them more flexibility when they are retired. And 73% reported that the notion that planning will make running out of money during retirement less likely.
Words and Phrases. Respondents said that certain terms and words are helpful in convincing them to better plan for paying for retirement. The terms which more than 75% rate as at least somewhat favorable in encouraging them to do so are:
- peace of mind (86%);
- taking charge (81%);
- control and flexibility, both at 79%;
- establishing a path (78%);
- less anxiety and step by step, both at (77%); and
- more success, retirement cushion, and responsibility, all at 76%.
Why This Matters
“The widespread lack of forward-looking planning has vexed retirement planners and researchers for many years. Many problems in later years could have been prevented with planning ahead. Too many people put off making important decisions, only to find themselves later in a serious crisis with limited options,” write Deevy and Vernon.
And they remind employers and retirement plan administrators of several factors:
- It is hard for people to envision and plan for greater longevity.
- There is an almost universal desire for “peace of mind” in retirement, as well as strong interest in flexibility and being able to exercise control over their lives.
- Most pre-retirees and retirees need and want help with the important decisions concerning retirement, but often are uncertain where to find that assistance and often do not even look for it.