Personal Finance FAQ

Could You Set Aside 78% More Money for Retirement?

Robert Jordan
This can affect your savings habits!

“The Wheel of Time turns, and Ages come and pass, leaving memories that become legend. Legend fades to myth, and even myth is long forgotten when the Age that gave it birth comes again.”
–Robert Jordan

“What has been will be again,
what has been done will be done again;
there is nothing new under the sun.”
–Ecclesiastes 1:9

Every day, you get up, you brush your teeth, shower, shave (perhaps), eat breakfast, walk the dog, and go to work.

Every year, there are seasons. Christmas, Hannukah, etc. come around every year. You celebrate your birthday – at least until you reach age 39, and then you stop.

If you think about your future and the narrative you’d tell about it, then the story starts to change. You think about change. You think about marriage, kids, promotions, big trips, and retirement. The future narrative is one that is different from what you’d tell about your day today or what tomorrow will bring.

But, most of our days are actually pretty much the same. For most of us, five days a week are pretty similar, followed by two days that are a little different, and then the cycle starts again. Weeks bleed into each other, interrupted by special, but predictable occasions: birthdays, vacation, holidays.

Yet, when we envision our financial futures, we think more of change than we do of cycles. We think about saving more in the future, having enough for retirement, getting that big pay raise and finally maxing out our contributions.

Is it possible that thinking about a changed future rather than a cyclical future that repeats itself is harming our chances of actually putting away enough to comfortably retire on?

That’s the question that Rice University’s Utpal Dholakia and the University of Wollagong’s Leona Tam asked in conducting research on the framing of our thinking about our future saving and investing.

Making the Savings Cycle Go Round and Round

In three different studies, the researchers asked participants to think about future savings by either envisioning a future that is different than the present or by thinking about the future as a cycle where events repeat themselves. They then checked back later to see how much the two sets of participants had saved.

The differences were stark.

Those who thought about the future as different than the present had no incremental savings compared to the control group. Those who thought about the future as a cycle where history would repeat itself saved 78% more than the other two groups.

The exact script that the researchers used to get people to focus on a cyclical future was:

This approach acknowledges that one’s life consists of many small and large cycles, that is, events that repeat themselves. We want you to think of the personal savings task as one part of such a cyclical life. Make your savings task a routinized one: just focus on saving the amount that you want to save now, not next month, not next year. Think about whether you saved enough money during your last paycheck cycle. If you saved as much as you wanted, continue with your persistence. If you did not save enough, make it up this time, with the current paycheck cycle.

The future will be exactly like the present: if you save money now, you will save in the next pay period. If you don’t save money during the present pay cycle, it is likely you won’t save money in the next cycle. We want you to focus on your personal savings in the present, and that is all. What’s more, at the end of the day, you will be able to look back and see how much personal savings you have achieved.

How optimism bias and the Peltzman Effect cause you to save less

You’re of two minds, at least figuratively. Inside of our skulls, we have the prefrontal cortex, the part of your brain that is the Thinking You which looks into the future, has rational thoughts, and can comprehend the complexities of Sartre. Beside it is the limbic system, what I call Monkey Brain since we share that part of our brain with our simian counterparts, which thinks about having fun right now. Every time you’re tempted by the man cave or Jimmy Choo shoes, it’s Monkey Brain whispering into your ear.

Since Monkey Brain wants fun now, he doesn’t want to be deprived of money available for the purchase of adult toys. Therefore, it’s in his best interest to convince Thinking You that the future is going to be better than the present – you’ll get the raise, that investment in pork snout futures will be a ten-bagger, you’ll win the lottery – so that Thinking You isn’t concerned about your current savings rate. After all, why save now, when it’s going to be a drop in the ocean compared to the oodles of money that you’re going to earn in the future?

Buffeted by this belief that you’re invincible in the future and you’re going to be filthy rich, you fall prey to the Peltzman Effect. As we saw in “How the Peltzman Effect Affects Your 401k,” this mental phenomenon causes us to take more risks when we feel safe and secure. Having convinced ourselves that prosperity is right around the corner because of our future situation, we figure we can take outsized investment risks now with what little we do set aside because, hey, we’ll make enough in the future to make all of those boring, “safe” investments.

Today, today, and today instead of today, tomorrow, and the day afterwards

If we frame our future thoughts as if we’re living another version of today, though, we short-circuit the optimism bias. There is no changed future for Monkey Brain to hang his hat on. Tomorrow will look a lot like today, so if we don’t change today, then tomorrow will look just the same. If we’re doing the right things now, then that’s great! We should do more of the same.

However, if we’re not satisfied with what we’re doing today, then we’re not going to be satisfied with tomorrow, either. You might not save 78% more, but you could; if the participants in the Rice study changed their behaviors that drastically, you might be able to as well.

History will be doomed to repeat itself.

If you want to learn more about optimism bias, check out this video by Tali Sharot, author of The Optimism Bias: A Tour of the Irrationally Positive Brain.

How do you think about the future? Do you think of it linearly, with lots of change, or do you think of it cyclically, that tomorrow will look a lot like today? Let’s talk about it in the comments below!


Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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