Role of Emotions in Saving for Retirement
According to Money Magazine, retirement planning is tough going. In "Can't save? Blame your brain," new research supports the notion that individuals are loathe to think long-term when it comes to investing. The lure of a large short-term payoff is hard to resist.
Citing three recent neuroscience studies, reporter Jason Zweig explains that instant gratification arouses the brain. Only the "promise of a much bigger reward" later on has a similar impact. As Professor George Loewenstein (Carnegie Mellon University) offers, "When our emotions are charged, we have a hard time waiting."
An already low savings rate and longer lifespans (resulting in the need to stockpile dough) add to the ill effects of any emotional resistance to put away for a rainy day. The current credit crisis has prompted some individuals to withdraw funds from their 401(k) accounts in order to avoid foreclosure. In "401(k)s tapped to save homes," USA Today reporter Christine Dugas describes this technique as expensive, once taxes and penalties are taken into account. Some employers prohibit participants from contributing to their accounts for six months thereafter, another deterrent to saving.
The message is clear. Whether hampered by an emotional reluctance to plan ahead or an urgent need to tap their post-work piggy bank to pay bills, the number of individuals who are retirement-ready is low.
Editor's Note: In 2002, the Nobel Prize in Economic Science was awarded to Professors Daniel Kahneman (Princeton University) and Vernon L. Smith (George Mason University) for their work in pyschological and experimental economics, respectively.
