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Here’s why our brains make it so hard to start saving for retirement

Studying behavioral economics has taught me that our brains don't make it easier for us to save.

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Image Source | Getty Images
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We earn a commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

Psychology is often just as important in personal finance as are the numbers — the way we save, spend and invest are all influenced by the way we think and feel, especially when it comes to preparing for future events like retirement.

Saving money for retirement is important because you'll need a nest egg when you're no longer working. The best way to guarantee an income when you're in your golden years is to save and invest as much as you can now while you are still working.

It can be tough to realize at first — and our brains don't make it any easier for us to get the ball rolling on saving for something that may seem so far away. There are the many psychological pitfalls our minds are subject to when it comes to saving, investing and taking the actions that will benefit us long-term.

Here's a breakdown of how our brains play a role in saving for retirement.

We don't make enough decisions with the future in mind

If you're in college or in your 20s, you probably aren't planning to retire for another 40-plus years. And if you're in your 30s, retirement is likely 30 years away. In fact, the average American retires around age 64, according to the Center for Retirement Research at Boston College.

Because of this, it's easy to feel like retirement is so far into the future and that we have plenty of time before we need to start preparing for it. As a result, many would rather treat themselves to things they can enjoy right now instead of stocking away money for a future that's decades away.

This thought process is called hyperbolic discounting and it happens when we're more inclined to make decisions that come with a more immediate reward instead of decisions that come with a future reward.

Put another way, we'd rather have $5 right now instead of $10 a week from now. Or we'd prefer to use our money to enjoy a shopping spree now rather than invest the same money (which would grow) to spend in retirement.

Of course, that's not to say that we should never spend for enjoyment in the present. Creating a budget can help us figure out how much we can comfortably spend on the things we love now and how much we need to sock away for retirement. You can use budgeting tools like the Mint app and Personal Capital to track your net worth, spending and create a budget for free.

Mint

Information about Mint has been collected independently by Select and has not been reviewed or provided by Mint prior to publication.
  • Cost

    Free

  • Standout features

    Shows income, expenses, savings goals, credit score, investments, net worth

  • Categorizes your expenses

    Yes, but users can modify

  • Links to accounts

    Yes, bank and credit cards

  • Availability

    Offered in both the App Store (for iOS) and on Google Play (for Android)

  • Security features

    Verisign scanning, multi-factor authentication and Touch ID mobile access

Terms apply.

Personal Capital

On Personal Capital's secure site
  • Cost

    App is free, but users have option to add investment management services for 0.89% of their money (for accounts under $1 million)

  • Standout features

    A budgeting app and investment tool that tracks both your spending and your wealth

  • Categorizes your expenses

    Yes, but users can modify

  • Links to accounts

    Yes, bank and credit cards, as well as IRAs, 401(k)s, mortgages and loans

  • Availability

    Offered in both the App Store (for iOS) and on Google Play (for Android)

  • Security features

    Data encryption, fraud protection and strong user authentication

Terms apply.

It's easier to do nothing than it is to make a change

Not only does retirement feel like it's decades away, but it can also feel a little daunting when it comes to figuring out which accounts to open and the rules around each investment vehicle. For example, you can only contribute up to $6,000 per year to an IRA or Roth IRA if you're under age 50 (after age 50, that limit increases to $7,000). But you can't contribute to a Roth IRA if your income is over $140,000.

And even after you finally nail down all the specifics, it's time to pull the trigger, sit down and actually open an account — and that's where some people falter.

"I'll do it tomorrow" becomes "I'll do it this weekend," which then becomes "I'll do it next weekend." Before you know it, you've gone a month or more and still haven't opened up your IRA account. And this doesn't just occur when it comes to saving for retirement; we're certainly guilty of repeating this thought process for just about any task — returning a package for a refund, cleaning our room or even canceling subscriptions and memberships.

This is often because people have a tendency to stick with their current situation since it's often easier to keep things as they are than it is to take the steps to make a change. This is called the status quo bias and one of the main causes of this bias is a lack of attention, as Richard Thaler and Cass Sunstein describe in their book, Nudge: Improving Decisions About Health, Wealth and Happiness.

People tend to say, "yeah, whatever" to situations where sticking with their default or current circumstance doesn't immediately hurt them or cause a large loss. So they continue paying $10 for a gym membership they don't use, let the dirty clothes pile up in the corner of their room and let the package sit until it's past the return date.

Of course, these situations do have some level of consequence (spending money you didn't need to spend on something you aren't using, for example). We just don't think the magnitude of that consequence is big enough or immediate enough for us to take action.

By the way, opening up a retirement savings account actually isn't something you need to reserve your entire day to do. I opened up my Fidelity Roth IRA and my parents' Roth IRA in a total of about 20 minutes — all I needed was birthdate information, address, social security number and some bank account details for transferring money. Then the accounts were up and running and ready for the first contribution.

Fidelity Investments

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go account, but minimum $10 balance for robo-advisor to start investing. Minimum $25,000 balance for Fidelity Personalized Planning & Advice

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go is free for balances under $10,000 (after, $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000). Fidelity Personalized Planning & Advice has a 0.50% advisory fee

  • Bonus

    Find special offers here

  • Investment vehicles

    Robo-advisor: Fidelity Go® and Fidelity® Personalized Planning & Advice IRA: Fidelity Investments Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Educational resources

    Extensive tools and industry-leading, in-depth research from 20-plus independent providers

Terms apply.

We underestimate how long it will take for us to achieve our desired savings

How many times have you said you can get an assignment done in a certain amount of time only to realize that it actually took you longer (sometimes even double your initial prediction) to complete it? This is called the planning fallacy and it's all too common — especially when it comes to our finances. We tend to underestimate how long it will take to complete a future task, often despite knowing that previous similar tasks have taken longer to complete than planned.

Because of this, many people put off saving for retirement until their 30s or 40s thinking that they should be able to amass as much as they'll need for their golden years in just two decades. But once they factor in their current expenses and financial obligations, they find that it'll actually take a lot longer than they initially believed to build a comfortable retirement fund. This is what one Select contributor experienced when he put off saving for retirement until he was 31.

It also doesn't help that, according to the Journal of Accountancy, 54% of people underestimate how much money they will need to retire. Underestimating how much money you need for retirement and how long it will take you to save that money can be a recipe for an underfunded nest egg.

You can get an idea of how much you should have saved by every age, but the most important age to start saving for retirement is your current age. Your employer-sponsored 401(k) plan is a great start (just make sure you're contributing at least the minimum required to receive the employer match). But also having a Roth IRA can help your contributions grow tax-free, even when you make withdrawals in retirement.

You'll, of course, have to invest your contributions, which can be tricky if you're new to investing. But apps like Betterment and Wealthfront take some of that confusion away by investing your money in a pre-determined, diversified portfolio that adjusts based your needs, interests and risk tolerance.

Betterment

On Betterment's secure site
  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, $0 minimum balance; Premium Investing requires a $100,000 minimum balance

  • Fees

    Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has a 0.40% annual fee

  • Bonus

    Up to one year of free management service with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment RetireGuide™ helps users plan for retirement

Terms apply.

Wealthfront

On Wealthfront's secure site
  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance

  • Bonus

    None

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks

  • Educational resources

    Offers free financial planning for college planning, retirement and homebuying

Terms apply.

Bottom line

Saving for retirement is one of the most crucial financial steps you'll need to take. Taking steps to save today can guarantee you an income in retirement when you're no longer working. Though we often experience setbacks as a result of our human psychology, understanding what's at play can help us take the first step in understanding and improving our habits.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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