Mark Biller: A SMarT Plan to Step Up Your Saving and Investing

Today’s American workers are being forced to shoulder a much higher level of responsibility regarding their retirement finances than past generations.

With Social Security projections showing significant shortfalls relative to promised benefits, and with most private businesses having switched away from offering traditional pensions and toward employee-driven 401(k)-style plans, two legs of the traditional “three-legged stool” of retirement income look a bit wobbly.

If Social Security and a traditional pension aren’t going to carry as much weight for the next generation of retirees, personal savings will have to take up the slack.

That is a troubling prospect, given the well-documented struggles Americans have saving money. Workers know they should be saving — some surveys indicate two-thirds of 401(k) participants believe their savings rate is too low. Unfortunately, good intentions aren’t enough — procrastination and a lack of willpower are tough obstacles for many would-be savers to overcome.

In recent years, a new wave of economists has been studying these “behavioral” obstacles to sound financial decision-making. One pair of these behavioral economists decided to tackle the problem of trying to get people to contribute more to their own retirement plans. Their findings can be applied as a blueprint for almost any would-be saver or investor.

These economists, Richard Thaler of the University of Chicago and Shlomo Benartzi of UCLA, created a plan they named Save More Tomorrow — or SMarT, for short. Their stated goal: helping those who want to save, but lack the willpower to act on this desire.

The SMarT plan involves four simple steps to boost 401(k) savings rates:

1. A considerable time before the next scheduled raise, an employee is asked to agree to increase his or her contribution rate when the next raise takes effect. By doing this, the decision carries no immediate financial ramifications.

2. If the employee agrees, the contributions are increased beginning with the first paycheck after their next raise. This generally allows the worker to still see an increase in take-home pay from the raise, while also boosting his or her retirement plan contribution rate.

3. The employee’s contribution rate continues to increase with each future raise until it reaches a preset maximum. This takes advantage of inertia — the scheduled increases happen automatically — instead of inertia working against the employee.

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SOURCE: Christian Post, Mark Biller