Heed the Ghost of Yourself Yet to Come


Back in July of 2013, I decided to move on from the turtle-logoed pages of Get Rich Slowly in order to devote more time to other professional and familial responsibilities. However, a few months ago I managed to find time to once again join this merry band of bloggers, which gives me the opportunity to pass along the results of a survey I included in my “farewell” post from 2013.

At the time, the members of The Motley Fool 401(k) committee (of which I am a member) had recently decided to auto-enroll new employees into the plan. That decision was made after significant debate. Some committee members argued that most Americans aren't saving enough for retirement and auto-enrollment is a way to “nudge” people toward saving more. Others said it was meddling too much in our colleagues' financial lives, especially since the Fool 401(k) has an above-average participation rate. Many years ago, I would have been more inclined to side with the latter camp. However, I had since seen too many people start too late with their retirement savings, so I sided with the pro-auto-enroll camp, which eventually triumphed.

However, we then had to decide on a default savings rate. According to Deloitte, the average deferral rate for auto-enrollment plans was 3 percent in 2012 — and that is a good start, but not high enough for someone who wants to retire in her 60s. Since auto-enrollment got Uncle Sam's blessing in the 2006 Pension Protection Act, the evidence indicates that auto-enrollment has increased the number of workers contributing to their 401(k)s, but the average savings rate has gone down. That's because many of the auto-enrolled folks stick with that low deferral rate, whereas people who actively enroll in their plans tend to choose to sock away 8 percent or so of their salaries. Some of us on the Fool's 401(k) committee argued that 8 percent was a good default rate for our colleagues-to-be because the Fool matched contributions up to that point. (We have since increased the match to 9 percent.) Others thought that was way too much, arguing that we don't know enough about peoples' finances to assume they can afford to forgo that much of their income.

It was in the throes of this debate that I requested middle-aged and older readers of my “final” GRS post to answer this question: “When you began your career, do you wish your employer automatically signed you up for the 401(k) at a savings rate of 8%? You could change the savings rate or opt out at any time.”

Before I give response options in the survey, take a moment to think about how you would answer that question (free of the influence of how others responded). I'll fiddle with some of my new Christmas toys while you think.

[“What does it say about me that people keep giving me whoopee cushions? And in what chair will Grandma be sitting?”]

OK, here are the choices followed by the percentage of respondents who chose each response.

1. No way! I didn't want anyone messing with my paycheck. (3 percent)

2. No, because I couldn't afford to save for retirement back then. (1 percent)

3. I wish I had been automatically enrolled, but at a savings rate less than 8 percent. (9 percent)

4. Yes, I wish I had been saving 8 percent all along. (43 percent)

5. Eight percent? How about 10 percent or higher! (44 percent)

The results may not be as jarring as the Ghost of Christmas Yet-to-Come showing Scrooge how delighted everyone will be when he's dead, but they did surprise me. Of course, it is easy to say you wish you had been saving more now without having to think about what you wouldn't have had or done in the past because you saved instead of spent. But this simple, unscientific study strongly suggests that most people wish their employers had nudged them to save more.

In the end, we on the 401(k) committee settled on a default rate of 2 percent that will gradually auto-escalate to 9 percent over a few years. We also changed the matching formula so that the first 1 percent of savings gets a two-for-one match, with additional savings matched fifty cents on the dollar up to that 9 percent. We thought this would encourage people to at least save a little, and make sure that those who couldn't save as much still got a big boost from the match.

As we move from the season of giving and receiving to the season of resolutions, spend some time envisioning your older self and how much spending vs. saving she or he would value the most. It might be just the nudge you need to save more, and will take less time than enduring a 401(k) committee meeting.

More about...Investing, Retirement

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rosarugosa
rosarugosa
5 years ago

I think the idea of future self is a powerful one, and I also like the idea of making it easiest to do the best thing (contribute to the 401k) and make it involve a little more effort to do the less good thing (opt-out). I think the 2% is a bit too conservative, but a step in the right direction.

Lanthiriel
Lanthiriel
5 years ago

I started saving for retirement when I was 22. I put in 5% to get the match. My next employer put a mandatory 15% into a SEP IRA. It was tough to swallow at first, but a good lesson that I could get by with a high savings rate. Now I’m at another new job and just upped by 401k contributions back up to 15%, hoping to pay off enough debt and buy a house in the next couple of years so that I can be maxing out those accounts by the time I’m 30.

jim
jim
5 years ago

I don’t like the “mandatory” contribution. It feels too “big brother-ish” to me. Everyone always thinks they know what’s best for others. Man up – take responsibility for yourself and don’t let others dictate your life. I see more and more companies doing this type of thing and WOW is it a step in the wrong direction. 1984 anyone? And if you aren’t familiar with that reference – go read the book.

mike
mike
5 years ago
Reply to  jim

I get what you are saying except the majority don’t do for themselves and you end up subsidizing them anyway with big brother on the back end. So in this case I believe the end justifies the mean. It would be great but naïve to believe that everyone would take responsibility for themselves, the evidence over the last 100 years proves otherwise. In this scenario I would rather see it mandatory, as it wouldn’t affect the people who save anyway, except in a positive way. As I can see it now the money we have put into social security will… Read more »

Margaret
Margaret
5 years ago
Reply to  mike

I completely agree with this assessment. I also want to point out that it is really more “automatic” than “mandatory”. You can always opt out or change the contribution amount. This is just a great way to overcome some folks’ inertia.

And I personally would like to see folks auto-signed up for the minimum amount that they need to invest to get the full company match. It’s usually a pretty do-able percentage, especially with the pre-tax consideration.

getagrip
getagrip
5 years ago
Reply to  mike

It isn’t mandatory. They can opt out just like they could opt in before with no ill effects on job promotion or requirements. All this does is help set them up for potential success if they are not thinking in those terms when hired.

siji
siji
5 years ago
Reply to  jim

I like the idea that employees are forced to contribute to their pension plan. In Nigeria, in the past, you automatically qualified for a pension till you died. But now, because the automatic pension is off, every employee contributes to a pension fund (after selecting a pension fund administrator of his/her choice). And the employer matches the contribution.

Dick
Dick
5 years ago

I’m Dutch and you will be happy (or shocked ) to hear it’s mandatory for everybody over here to pay into a pension fund of the branch of your chosen profession and it will be automatically subtracted from your salary.

Amy
Amy
5 years ago

I believe strongly in making sure to enroll at least to the amount being matched. So, having the auto enrollment is a good thing at that level. However, is there a way to opt out if you need? When I was in grad school, the University I attended and had a Research Assistantship at required us to contribute 7% of our income to the 403(b) – with no matching! That was a huge burden to a student. I was working with someone who had a family and was barely surviving as a student. I never got around to rolling over… Read more »

Dennis Frailey
Dennis Frailey
5 years ago

I’m now retired after a 40-year career working in the high-tech industry, most of it with one company. My employer started us off with a program where they made a contribution to our retirement program every year based on their profits that year. But what got me to start contributing were two things: an individualized annual report and an annual meeting. 1) They sent out an annual report to each of us on our retirement prospects. It showed where our retirement program would be by a normal retirement age (65), where our social security would be, and how much that… Read more »

Scooze
Scooze
5 years ago

I actually think 2% was a bit of a cop-out. You made the bold move to auto-enroll people (who by the way could change things at any time), but then enrolled them with a negligeable savings rate. Why not go all the way and help them to actually save for retirement? But I do give you kudos, especially for what I assume is a small firm, to make a half of a bold move. It’s new for many firms and is still gaining popularity in the market. It’s also great that you tout to this to other employers who could… Read more »

Mysticaltyger
Mysticaltyger
5 years ago
Reply to  Scooze

I agree. I think 2% is incredibly skimpy. It should be at least 3%. As long as they have an option to opt out, I don’t see the problem.

Zambian Lady
Zambian Lady
5 years ago

In my organization, everyone has to either join the pension fund or show proof of being a member of another social security fund. Those exempted are people working for very short periods, e.g. for three months.

Mary Grace @ Investment Total
Mary Grace @ Investment Total
5 years ago

Awesome Post! This is totally informative. When I started investing, I feel afraid now I feel confident because I can see how my money grows overtime, thanks to the power of compound interest. I think it is wise to make an asset allocation strategy especially when we are near at retirement years. To secure our hard-earned retirement savings account.

Kayla @ Femme Frugality
Kayla @ Femme Frugality
5 years ago

I started saving 5% (to get my full employer match) when I was 19. I try to increase it by 1% each year, though sometimes I haven’t. I still have consumer debt to pay off, so I’m not fully focused on saving for retirement, but I do save some so my future self won’t be without!

Louise
Louise
5 years ago

A a new teacher back in the early eighties, I was enrolled at a 7% contribution rate in my state’s pension plan. As a compensation for a lower salary than my private-industry counterparts, this was to be matched by my school district and state. Especially during the explosion of the new consumerism in the eighties, there were moments when I wished I had more money to buy Cuisinarts, etc. However, our family survived. Now I am grateful that I have a pension to look forward to, because I was required to save. I shudder to think what our situation would… Read more »

essbee
essbee
5 years ago

Robert, I’m interested in the MF participants’ response. I was involved in a similar plan design change at the end of 2012 and got to watch the results over the last couple of years. My company us uses a major third-party recordkeeper and we asked our account manager for perspective. What we learned was that opt-out (and even more surprisingly opt-down) rates are essentially the same no matter what the auto-enroll percentage is. Meaning that new participants act the same whether they’re enrolled at 1% or 10%…with the caveat that, at the time, there were very few comparator plans at… Read more »

Michael Mota @ negativetopositivenetworth.com
Michael Mota @ negativetopositivenetworth.com
5 years ago

I also believe that an automatic savings retirement plan is a great idea and should require a 10% savings rate. The bottom line is this either people save for their own future or we will have to support them with social security.

Rail
Rail
5 years ago

I wish we had some kind of 401 matching at my employer. We have no match of any kind and I goofed off for many years and was contributing only 4%. I raised it to 7% last year and am raising it to 10% next week. I am 45 in a month and can retire at 60 with full Railroad Retirement, with the intention of not touching my 401 until age 70. I think a automatic 401 contribution should be the default option for most people, me included!

Chelsea @ Broke Girl Gets Rich
Chelsea @ Broke Girl Gets Rich
5 years ago

That actually sounds like an incredible idea.

Though I’m self-employed now, it would have been absolutely incredible to have some savings invested towards retirement from my first jobs in high school and college. Even if it was minimum wage, it would have been *something* – and something is WAY better than nothing. And in the 10 years it’s been since my first job earning $6.50/hour – I’d be pretty happy with that.

Vanessa
Vanessa
5 years ago

My company auto-enrolled everyone in the 401k program in January of this year. I noticed my paychecks getting smaller, but chalked it up to working less hours or maybe an increase in taxes. But then I began having a hard time meeting my budget, so I finally looked at my stub and saw the 401k deduction. This was around the end of February. HR said we were given notice a few months prior that this would be happening but I don’t recall receiving any such notice. I think the amount was 2 or 3%, which some people will say you… Read more »

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Vanessa

This is a good example of what happens when people don’t start saving from day 1 on their first job. A person develops a life style based on their income and then it is very hard to back off on that life style when they lose your job, have some other major financial setback, or simply realize that they need to be saving some of that income for retirement. A person will have chosen a place to live, forms of transportation, and many other things based on their current income. You see it often with professional athletes and people in… Read more »

Vanessa
Vanessa
5 years ago
Reply to  Dennis Frailey

You obviously missed the part where I said I max out my Roth. That itself is nearly 20% of my income so for some people like myself who already don’t earn a lot that extra 2-3% does make a difference. Any extra money goes into my emergency fund since I actually have been through a layoff and had major surgery at the same time a few years ago. It was the cash in my checking account that got me through that time, not the money in my 401k. Maybe lifestyle inflation is an issue for some, but it’s not for… Read more »

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Vanessa

I have to apologize, Vanessa. I didn’t miss that “max out on Roth” comment but I failed to recognize how much of a portion of your income that amounted to.
My basic point is that, including your contributions to social security and all other retirement vehicles, you should be putting in 15-20% of your income, which you clearly are.

Blissex
Blissex
5 years ago

As always I am stunned by how little people save for a pension.

Foer a “good” pension that gives you around half of what you use to earn, one needs to save at least 25% of current income.

That 25% was more or less what cost employers to provide union pensions, which were far from generous. People saving less than 25% of current income are going to be rather poor during retirement.

Dennis Frailey
Dennis Frailey
5 years ago

Here’s some very simple, 5th grade arithmetic: You will probably work for 40 years and be retired for 20 years, if you are average. So for every two years you work you need to set aside enough for one year of retirement. Some of that of course is automatic for most of us in the form of social security (in the US) or other forced retirement programs in other parts of the world. But you need to save more than that if you want your retirement lifestyle to be anything like what you grow accustomed to while working. I speak… Read more »

Blissex
Blissex
5 years ago
Reply to  Dennis Frailey

«So for every two years you work you need to set aside enough for one year of retirement.» Investment returns boost that, but less than most people count; the very best *risk-adjusted* returns are of around 2-3% *after inflation*, and not many people get as much, because the *net of fees* returns are lower still. «more than that if you want your retirement lifestyle to be anything like what you grow accustomed to while working.» To get that I think a total saving rate of around 50% is necessary for most people. PS the savings rate includes paying off a… Read more »

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Blissex

“To get that I think a total saving rate of around 50% is necessary for most people.” My math says it should be 33% under your pessimistic assumptions. But that includes your contribution to social security, and then there’s any employer contributions to 401Ks and the like, so it’s closer to 25% from your take home pay if I accept your assumptions about returns on your investments. My experience with relatively conservative investments was a lot better over my 40 year career, hence the 15% (plus social security, etc.) recommendation — IF you start in your 20’s. My overall return… Read more »

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