Later is such a non-concept. Now is much more concrete. I know what now looks like. Now, I know what I like, what I don’t like and what I want. I think I know what I want for later as well. But do I?
In my previous article I have touched upon the present bias. This is a strong bias to put extreme value on having things now, compared to having them later. Even if there is only the slightest delay, there is a loss of value associated with it. Getting things later is not nearly as desirable as getting them now.
This is an obvious issue. If things now are strongly preferred to things later, how do we make sure there is even a later to get to? How would this even work for retirement savings?
It obviously doesn’t work. Debt is soaring, savings are dwindling and retirement savings specifically seem to have become a foreign concept. Each generation is doing worse when it comes to looking long-term. Why?
The present bias doesn’t explain it all, although it is a strong foundation. I prefer to have things now as well, but I can see that having it all now, would take away resources from later. But am I acting on this knowledge? Can I picture what any change I make now will look like later?
I fail to be able to see “later.” As a result I am procrastinating giving up wealth now. I am procrastinating my savings. Consumption now is tangible, consumption later a mere idea. I don’t know what the future will hold. I see it when I get there. I am expecting my older self to deal with this. I am expecting my preferences and behaviour to change later. This is procrastination at its finest.
This type of procrastination is fuelled by what is known as the projection bias in behavioural economics. The projection bias refers to people’s assumption that their preferences will remain the same over time (Loewenstein et al, 2003). If this were the case, my procrastination is justified. My preferences won’t change, so my behaviour wouldn’t have to either. But my preferences won’t remain the same. I might like to consume now and save very little, but in 40 years from now (or potentially much sooner), I will curse my younger self for saving so little, as now there is barely enough left to live off.
You can see how this would be an issue for retirement savings. We overestimate how valuable things are now, whilst underestimating how useful the savings will be later. This is a double whammy: overvaluation of the now by the present bias, and the lack of understanding and as a result undervaluation of savings for later by the projection bias. The outcome: delayed poverty.
I am very serious about warning against the overvaluation of the now. I am worried that the words “delayed poverty” don’t mean much to people either, because they are convinced that what things are like now, will continue to be later. But there is no continuity if it is not ensured. To continue as we are now, we need to plan for later, instead of assuming it will just occur naturally. Because it very likely won’t. And personally I wouldn’t take the chance.
There are solutions for making “later” seem like a more concrete concept. Research by Hershfield et al (2011) has already looked into this. The idea of the research is quite simple. In the study participants were able to determine how much they would save now, for their retirement later. As these decisions were made they were faced with an “age-progressed renderings of their future self.” This future self was able to give emotional feedback on the amount saved for later, to continue current levels of expenditure, or just staying above the poverty line. Being under the poverty line didn’t seem to mean much to people. But an older version of yourself crying because they can’t afford food, that will do the trick. The emotional facial feedback of the future self significantly increased retirement savings. Direct results were visible what would happen later, by decisions made now. Later became a tangible concept at last.
If you are not ready to be faced with a version of yourself in a couple of decennia: fair. It would make me uncomfortable as well. But you have to do something. Make the projection bias work for you. You think you’ll have the same preferences today as you’ll have in 20 years? Cool, let’s take that as our starting point. What are you earning now? What are you spending now? Imagine you wouldn’t gain any additional income, and won’t have any income later as you retire. How much will you need per month. How much is that total given the average life expenditure. And how long do you still have to get that amount of money together? I’d start saving soon….
If you’d rather work with relative rather than absolute numbers that’s fine to. It’s how Save More Tomorrow (SMarT) by Thaler and Benartzi (2004) worked as well. They enrolled employees in several retirement saving schemes. The most successful scheme? One that increased the percentage of savings with every income increase as well. This is effective as the actual income taken home (so not put away for saving) never decreased in itself. Retirement savings went up without the individual doing much. Although everyone was allowed to opt out, few ever did. A strong case for negating the projection bias, but also for the default setting. We will dive into the power of defaults in a later article.
What can I say? Now is tangible, later is not, yet. But it will be. Whether you can picture it or not, later is very likely to happen and you might want to prepare for it. Do not assume you can go on as you are now. Plan ahead. Don’t underestimate the value of the things you can have later. Delayed poverty is avoidable, so avoid it.
References Hershfield, H. E., Goldstein, D. G., Sharpe, W. F., Fox, J., Yeykelis, L., Carstensen, L. L., &
Bailenson, J. N. (2011). Increasing saving behavior through age-progressed renderings of the future self. Journal of Marketing Research, 48(SPL), S23-S37.
Loewenstein, G., O’Donoghue, T., & Rabin, M. (2003). Projection bias in predicting future utility. Quarterly Journal of Economics, 118(4), 1209-1248.
Thaler, R. H., & Benartzi, S. (2004). Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of political Economy, 112(S1), S164-S187.