Studies show that we are living longer and retiring later, but too many of us are not adequately preparing for retirement. People who do not save for retirement often do not have access to an employer-run retirement program, do not understand how much money they will need to save, or lack the financial knowledge to make the best investment decisions.

For many, working longer seems to be the new retirement strategy.

There are many reasons why individuals do not always act in their best interests when it comes to saving for retirement. In his book “Misbehaving – The Making of Behavioral Economics,” Nobel Prize-winning economist Richard Thaler identifies some reasons why people often fail to save for retirement. These include inertia that keeps people from even taking action to begin to save; loss aversion that keeps people from taking actions that reduce their paycheck; and a short-term focus on actions that provide immediate gratification rather than planning for the future.

Because of these natural behavioral factors, a defined contribution retirement savings program often fails to overcome the following behavioral barriers and leads to less than optimal outcomes:

  • Lack of access to employer-based retirement savings plans. According to the U.S. Government Accountability Office (GAO), 84% of the workers who do not participate in workplace retirement savings programs reported that the main reason was not having access to a workplace retirement program rather than a failure to participate.
  • Short-term horizons. Many workers tend to be more concerned about day-to-day financial needs than their future financial plans. In addition, if employer retirement investment decisions are complex, inertia can take over and they may simply never take action.
  • Limited financial knowledge. Not knowing the ABCs of finance, such as maintaining a budget or managing credit, makes workers much less likely to save for retirement. As the GAO has reported, without proper knowledge to figure out the numbers or work through the complexities, workers are much more likely to over or under estimate how much they need to save or just give up on saving.