A recent study from BMO found that Canadians believed they would need more than $1.7 million to comfortably retire. Yet many individuals nearing retirement have less than $100,000 saved. Why is thinking about saving - even when you have the means - such a daunting prospect? Assistant professor Avni Shah joined the Executive Summary to explain the behavioural barriers to retirement savings, and showcase some of her research into how we might overcome these blockers.
A recent study from BMO found that Canadians believed they would need more than $1.7 million to comfortably retire. Yet many individuals nearing retirement have less than $100,000 saved. Why is thinking about saving - even when you have the means - such a daunting prospect? Assistant professor Avni Shah joined the Executive Summary to explain the behavioural barriers to retirement savings, and showcase some of her research into how we might overcome these blockers.
Show notes
[0:00] Retirement is a rich man’s opportunity, and many people don’t feel they’ll ever have the luxury.
[0:30] Meet Avni Shah, an assistant professor of marketing who studies how and why people make financial decisions.
[1:14] People probably aren’t saving enough for retirement, even if they understand conceptually that they need to save more.
[2:08] Why? Well, we have a bias towards dealing with the needs of today…
[2:35] …the future is hard to imagine…
[3:07] …and it’s cognitively costly to think about ephemeral things like money when it’s so far into the future.
[3:33] Finally, the narrative around retirement – living your best life – might not be effective for large swaths of the population.
[5:35] Avni partnered with Ideas 42 and the Mexican government to help increase the rates of voluntary retirement contribution. They devised three experiments.
[5:46] How the Mexican pension system works.
[6:18] How does beautifying a form impact retirement savings?
[8:20] To increase your desire to save, tell yourself a story about your future.
[9:40] Sometimes what’s requires is a shift in messaging. Instead of selling the idea of “saving for your future,” companies might want to consider selling the idea of “saving for your family’s future.”
[11:58] But it’s important to remember that any behavioural nudge is going to be contextual, and there’s no one-size-fits all approach.
[12:48] Simplifying information can also backfire if the info that’s left is demotivating.
[13:34] And, for individuals, picturing your life in retirement can be a huge motivator for squirreling away a bit more cash.
[14:06] “It makes it easier to see and it's something that is beneficial to them to say okay, that in conjunction with then making it savings automatic and can be tremendously valuable in encouraging people to save and really living in a way that they're not scared about the future.”
Avni Shah: In Canada, throughout the world really, if you ask them, “Okay, so what is does life in retirement look like,” you'll see many people say, “What retirement? I'm going to work as long as I physically can write as much as I can.”
Go to different financial advice groups on Reddit, you'll see many people say things like, “Well, I just can't afford to retire. And so I don't even think about it, I don't even plan for it. Because well it's a luxury.”
I 100 per cent think that retirement is a rich man's game for many people.
Megan Haynes: Avni Shah is an assistant professor of marketing at the University of Toronto Scarborough, with a cross appointment to the Rotman School of Management. She studies how and why consumers make financial decisions, and she recognizes that saving for retirement can be daunting and a challenge, even when you have the extra cash to put aside.
So what does the research tell us about how to improve rates of retirement contributions, and are there lessons you can apply to your own life to kickstart your savings goals?
Welcome to the Executive Summary, I’m Megan Haynes, editor of the Rotman Insights Hub.
Musical interlude
MH: On the whole, we’re probably not saving enough for retirement. While Canada does have the Canadian Pension Plan and provincial programs, payouts from the government-led program likely won’t sustain most people’s preferred lifestyles, which means we should be saving in other ways, such as through a TFSA or RRSP.
A 2023 study by BMO found that most Canadians believed they would need around $1.7 million saved to confidently retire.
But, according to a separate 2023 survey by HOOPP – a pension program for the healthcare space – 75 per cent of Canadians nearing retirement age – those 55 to 64 – have less than $100,000 set aside. Thirty-two per cent of all Canadians haven’t set aside any money for retirement.
So if we believe we need a lot of money to retire, what’s holding us back from making extra contribution?
Part of the issue is we have a focus on immediacy.
AS: There’s that real preference for today. I have to deal with my needs today. We think a lot about, okay, well, I know that I need money for that coffee, maybe another coffee in the afternoon. Certainly lunch, oh, there's an event tonight that maybe I want to go to - the theater show or I want to go to a music festival, whatever. We're thinking very in these very short, very present time spans and we know what our life is like today.
MH: It can also be very difficult to try and empathize with your future self.
AS: It's hard to think about the future, particularly when it feels like you're going to be a different person. So I can't even think about my life during the time of retirement because it feels so far away. I feel very disconnected to who that temporal self even is.
So if you asked my parents 20, 30 years ago, “Okay, what is that life that you're going to lead during the time of retirement?” I'm not sure they would have been able to even predict the things that they're doing now. It becomes this very abstract, very ambiguous sort of future that is hard to imagine. That poses a real challenge for many folks.
MH: And of course, for some people just wrapping your head around the numbers and process involved is overwhelming.
AS: It's quite cognitively costly even just understanding compound interest, that even the small amounts are really beneficial, because you have so many years that it can compound and really help you. And so for many people, there's that disconnect of well, how does that little amount of money going to get me to that big sum? And that just becomes very challenging as a math problem.
MH: But there are also more systemic issues with the self-centric narrative around retirement. Much of the messaging from pension funds and banks – particularly in North America and Europe – is around saving for your best life post work. Save now and unlock your future.
AS: Money is completely fungible. We don't know exactly what we need it for. And in a lot of cases, money really signals whatever your priorities are. And that's what really drives a lot of our financial behavior.
MH: For some folks, that means extra money to travel, to live comfortably at home, have dinner out or see shows whenever you want.
That doesn’t resonate with every culture, or even every socio-economic background. Studies have shown that people in lower-income brackets or from more eastern cultures have a more community-focused outlook.
AS: I want to be there and make sure that I have enough money to help my niece go to college and have the money for that, or my grandkids, right? The preference of saying, “Well, I want to make sure that my family, my close knit group is really taken care of,” and so with that, of course, messaging that is really geared towards saying, “Hey, if you save for retirement, or you save for this future, you get to live your best life, and you get to travel everywhere, and you get to have all the luxury cruises you want, or whatever that kind of individualistic goal might be” - that doesn't become as motivating for people that are saying, “Well, I don't even care so much about that, I rather make sure that everyone is taken care of.” And so then it becomes easy to trade off and say, “Hey, I'm willing to sacrifice that own retirement life, for the benefit of well taking care of everyone I can today.”
MH: So considering these psychological and cultural barriers to saving, is there anything that can be done to encourage people to squirrel a bit more away for retirement?
Musical interlude
MH: Avni partnered with Ideas 42 and the Mexican government to look at different ways to encourage people to put aside a little bit extra for retirement.
First a little bit of context: Everyone in Mexico contributes a minimum percentage of their earnings to one of 11 pooled retirement funds.
These funds are privately managed and are required to provide regular updates about how an individual’s personal retirement goals are shaping up and how the funds are doing, generally.
Citizens can opt to switch funds at any time, and importantly, they can opt to increase their minimum contributions – which is what Avni and her team were looking to encourage as very few Mexicans made additional payments. The first study they did looked at the form people received that provided fund updates.
AS: Everyone had the same kind of well, boring form, right. And when we're looking at this form, we're thinking, well, this is quite technical, right? This is quite - well - unengaging and boring. And could you redesign forms to make it a lot more visually appealing, provide information that's simple, motivating, and easy to understand. And hopefully then really motivates people to save for retirement. And so what we did is we took those boring forms and instead sort of scrapped it.
MH: The revamped form was beautiful. It had a thermometer at the top that highlighted how far they needed to go to meet their savings goals. It included a pair of cartoons that encouraged people to picture whether their retirement would be a restful, leisurely one or one filled with work. And importantly, it included a cut out that made it very easy to increase contributions.
The simplified form was sent to two of the 11 funds, and the results were pretty surprising.
AS: We got the data back from one firm that we work with. And just as predicted, retirement savings have now improved substantially from about less than one per cent to now over two-and-a-half percent. I'm thinking, well, that great, great stuff.
MH: The other firm that received the simplified form, however, saw a marked decrease in additional contributions.
AS: One of the things that was mandatory, that had to be included in every form at every firm by the government, they wanted to really improve transparency. And so they required this ranking table, which ranked the firm's from highest to lowest on the rate of return.
MH: The firm that saw a boost was ranked near the top of the list; and the firm that saw a decline was ranked towards the bottom.
AS: When you make things simple, then whatever information that remains, that's information people will focus on naturally. And if that information is good, fantastic, it's going to make things even better.
In the other case, now making it simple, making it more fluent, easier to process then leads people to basically it makes it easier to see that their firm is lower ranked and then as a result of lower confidence. They feel worse relative to others, they feel demotivated.
MH: In another experiment, Avni and her team wanted to see if they could get people to paint a clearer picture for themselves about what retirement might even look like.
AS: One big barrier, at least for retirement savings is people didn't really feel connected, or even have an idea of what the future looks like,
MH: So, working with the pension sales’ teams, Avni and her fellow researchers developed a two-stage exercise. First, the sales team would ask people basic questions about their current lifestyle.
AS: Okay, who do I love to spend time with now? What are the types of activities I like to do now? Like over the weekend? What's my favorite thing to do? During the evenings, what do I do? Where's one of my favorite places to visit now?
MH: Next, they go through a series of questions about what they plan to do in 20 years.
AS: Who is a loved one that I want to spend time with? Where do I want to live? What are the activities I think I'm gonna really enjoy doing on the weekends? How about the evenings? What is a hobby that I'd like to do in the future?
MH: Then, they’d generate a story, which the person was encouraged to read aloud.
AS: The thing that happened with a lot of folks is that they got, in some cases, quite emotional, thinking about what that future looks like.
MH: Finally, they were then asked if they wanted to increase their contributions.
AS: We had a huge change. So it went from like .1 per cent, all the way to close to four-and-a-half percent.
MH: The final study tried to reframe how companies talk about retirement. One of the big issues we mentioned earlier is that the idea of “living your best life” doesn’t always jive with all cultures or socio economic backgrounds. Avni thought that might be the case with many Mexican workers.
AS: Before we stepped into doing any of these field experiments, we did qualitative interviews with about 100 different people from Mexico. And one thing that kept coming up, is that people would say things, “It's okay if I sacrifice my own retirement, because I really want to make sure that I take care of my family, I want to make sure my kids have a great birthday party or really rich life that their needs are met.” And so what then we realize is that, for many of the individuals, the barrier was not simply, oh, I don't understand the math here, I don't understand the process of how to do it, there was certainly a challenge for some. But for many people, the challenge is that they could care less about their own retirement rather, they wanted to take care of their family, which is a very admirable and wonderful goal. And many people can relate to that.
MH: So they tweaked the messaging in a simple text exchange. Instead of asking people to consider saving a bit more to ensure their future, the researchers ask them to save a bit more to ensure their family is taken care of. Again, the nudge was effective, and on the whole, more people opted to make additional contributions. However, Avni adds a few caveats.
AS: We saw that there was a different response for those who are 28 and younger. They were actually significantly less likely to make a retirement contribution relative to sending no text message at all.
But then for people who are like 29 to about 43, huge boost in in voluntary contributions. And then it sort of kind of was positive, but sort of petered out for those other folks.
MH: Considering the timing of where people are at in their lives, that makes sense. In your early 20s, priorities might be around building a career or saving for a home. Once you begin having kids, now you have a family to think of. For this study, the context mattered immensely – which is an important take away.
Musical interlude
MH: So what can we apply here in Canada?
Well, first, it’s important to remember that any kind of behavioural nudge isn’t going to work for everyone, all the time. One thing that’s clear in Avni’s research is that one push – like a focus on family – might work well for people with children or elderly parents at home, but might be less effective for people just out of school who aren’t even in a relationship.
AS: Thinking about solutions in terms of a one-size-fits-all approach is detrimental for everyone. Because something on average means it doesn't work for everybody equally. There are some groups that are really going to respond positively, some that respond negatively. And we have to think about that if like what are people's actual priorities, what are the things that people really care about? And what's that barrier.
Everyone's different. But it doesn't mean you can't scale anything. But really think about, well, can we tailor things accordingly? Can we make it a little bit more custom?
MH: Organizations looking to simplify their messaging to encourage saving should also remember that simplification can backfire if negative info becomes more prominent.
AS: I think we want to make things simple and easy for people to understand. What are the benefits for making that contribution? So you want to make it very simple, easy to understand. But then think about broadly? Well, what is the information that's being highlighted? If there's things that maybe are in a negative light, then you don't want to demotivate them, but then give them alternative solutions of how to fix that situation. So it's so that they feel motivated, right, and then they make a change in a way that's going to be beneficial.
MH: And for individuals, Avni offers some basic tips, including making extra payments to retirement savings automatic and as seamless as possible, and to remember every little bit makes a difference. But she also suggests before sitting down with a retirement calculator, consider telling yourself a story about your own future. What do you want it to look like? Who do you want to be there?
AS: I think for many of us, it's very hard to envision what life is gonna be like, in the future?
Play that game of what's that life going to look like when I don't have to work? I can go to lunch. I can travel a lot more, but okay, great. But what does that what does that mean, in terms of the money that I need in the capital, I need to be able to afford that? And so I think playing that out is very helpful for many people. It makes it easier to see and it's something that is beneficial to them to say okay, that in conjunction with then making it savings automatic and can be tremendously valuable in encouraging people to save and really living in a way that they're not scared about the future.
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MH: This has been Rotman Executive Summary, a podcast bringing you the latest insights and innovative thinking from Canada's leading business school.
Special thanks for assistant professor Avni Shah.
We’ll be back in a few weeks with associate professor Maja dgee-kitsch to talk about processing emotions in the workplace.
This episode was written and produced by Megan Haynes. It was recorded by Dan Mazzotta, and edited by Avery Moore Kloss.
For more innovative thinking, head over to the Rotman Insights Hub, and subscribe to this podcast on Spotify, Apple or Google Podcasts.
Thanks for tuning in.