Richmond Times-Dispatch Weekend
Saving to Keep Up With the Joneses
By now we all know that saving for retirement should be a priority. But most of us are still stumbling around in the dark, not saving enough or unsure of even how much we should be saving, according to a recent survey of investors by T. Rowe Price.
Would it help if we knew how much our neighbors or co- workers were squirreling away? More specifically, if we knew they were out- saving us, would we boost our savings rates to keep up with the Joneses?
Research is ongoing, but so far the answer is: It depends.
Based on the idea that we never really leave high school, peer comparison is one way that economists and others are attempting to modify our financial behavior. Cluing investors in on their peers’ financial decisions can influence the decisions they make about their own money, if you show them convincingly that what they’re doing doesn’t meet the norm, explains Matt Fellowes, founder and chief executive of HelloWallet, which works with employers to provide financial guidance to their employees via the Web and mobile devices.
“But it doesn’t work for everyone,” he says. “It’s not a silver bullet.”
More than half of respondents to a new ING U. S. consumer survey claimed they would be motivated to save more for retirement if their nest eggs didn’t measure up to those of their peers, but nearly one- third insisted they would not succumb to peer pressure and would not be motivated to save more at all.
When some employees are told of their co- workers’ higher savings rates, they are actually less driven to save, according to a study by Stanford University economist John Beshears and colleagues.
INGCompareMe.com is a free, Web- based tool that lets investors measure themselves against others on a range of saving, spending and per- sonal- finance matters. A few years ago, ING test- drove the concept with employees of several of its retirement- plan customers.
“Twenty- one percent increased their contributions or joined a plan,” says Deb Dupont, director of the ING Retirement Research Institute.
Mr. Fellowes has witnessed a similar bump in savings rates among HelloWallet members. He says that for peer comparison to be effective at all, it’s crucial not to scare people with what he calls “shock and awe” tactics.
“We’ve tried: ‘ You are $ 5 million behind on your retirement savings! What is your problem?’ ” he says. “But emotionally what happens is people shut down and move on.”
Indeed, Mr. Beshears and his colleagues suspect that the employees in their study who had a negative reaction to the peer information they were given got discouraged when they saw how far behind they were. “Our experience shows that sometimes people get demotivated,” Mr. Beshears says.
Another problem: “Who’s to say your peers are saving enough?” he adds.
HelloWallet tackles both problems by framing the issue for its members this way: You are making $ 5,000 a month now. In retirement, you’re only going to be making $ 2,000 a month, based on your current savings rate. On average your peers will be making $ 4,000, but the very best savers among them will be making $7,000.
The trouble with drawing comparisons only to average workers is that it risks setting the bar too low. “The majority of the American public is driving off a cliff financially,” says Mr. Fellowes. “They’re just driving at different speeds.”
Highlighting what the best, most financially healthy people in a peer group are doing provides a more realistic target. ( This assumes you have an accurate picture of people’s assets and liabilities.)
It also taps into people’s innate desire to avoid being ordinary. “When you’re in high school you want to be the quarterback or the cheerleader,” Mr. Fellowes says. “You don’t want to be the average student.”
The phenomenon has been dubbed the Lake Wobegon effect, after the fictional town dreamed up by radio host Garrison Keillor, where “all the women are strong, all the men are good looking, and all the children are above average”— and, presumably, all the investors fund their 401( k) s to the max.