Not to long ago, I was listening to a discussion on NPR about why people have a hard time saving for retirement. One of the reasons that many people have a hard time getting excited about saving for retirement, according to this discussion, is that they view retirement account contributions as a loss. And that makes it hard for them to decide to invest.
Aversion to Loss
The NPR discussion cited research that indicates that most consumers have a strong aversion to loss. In fact, many people are more concerned about losing something than they are excited about getting something. You might be happy when you feel like you are gaining, but you are completely devastated when you feel like you are losing.
This strong aversion to loss is one of the reasons that it’s difficult for many people to get excited about contributing to their retirement accounts. Making that contribution feels too much like a loss.
Retirement Contribution = Losing Money?
As humans, we don’t always see things in terms of the big picture. In fact, studies indicate that it is quite difficult for us to see the long-term and visualize the future. If it isn’t concrete and immediate, it’s hard for us to see the value in certain actions.
This is where a retirement contribution as loss comes in. When you have to consciously take that money out of your checking account and put it into your retirement account, it feels like you are paying money – not saving it.
The perception is that you are taking money out of your checking account, and when you see that checking account number drop, it feels as though you are losing out. You might even feel a bit of a financial pinch when you move the money out of your checking account into your retirement account. This makes the saving painful, rather than something you want to do.
Saving Your Money Before You See It
According to the discussion on NPR, one of the best ways to remedy this loss aversion you feel is to have the money contributed to your retirement account before you have a chance to see it in your checking account.
For those who have employers, this is fairly easy. All you have to do is have the money automatically withdrawn from your paycheck. This sort of contribution takes the money away from you before you have a chance to see it. Then, instead of taking the action yourself, it is taken for you. You see your paycheck, and that is all the money you have to work with. Contributing to retirement doesn’t feel like a loss.
Not all of us have employers, though. I am self-employed, so I don’t have the option to have my contribution taken from my paycheck. Even so, I’ve discovered that this principle can still work in my own life. Automatic withdrawals and transfers can help you set things up, and create a financial system that keeps you contributing to your future.
When I have to transfer money to my Health Savings Account, I have a hard time with it. It really does feel as though I am losing out – even though I know about the advantages. Unfortunately, I’m not allowed to set up recurring transfers to move money automatically from my checking account to my HSA. So each time I do it, it feels painful.
On the other hand, I do have an automatic withdrawal set up for my Roth IRA contribution. This automatic Roth IRA contribution withdrawal is taken care of in my personal finances software, as well as with the banking transaction. This means that when I check my account, it’s already accounted for, and I don’t have to make the effort to transfer the money. I see what’s available, and I don’t have to do anything else. This makes the whole thing easier to swallow.
What do you think? Does it feel like a loss when you contribute to your retirement account? What do you do to alleviate those feelings of loss?