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If you wanted to fly to Europe, would you simply show up
at the airport one day hoping you had enough money to pay for the ticket? Of course
not.
So why are millions of Americans behaving
this way when it comes to their life dreams, including retirement? Surveys indicate that
while most people have aspirations, barely half of all Americans are taking concrete
financial steps to reach their goals. mPower recently brought together financial and
retirement experts and ordinary workers to find out why, and to see what can be done about
it.
What are your dreams? When mPower asked 482 people that
question, everyone had an answer.
"My dream is to retire at a young enough age to enjoy
life," was one response. "I would say retiring at 55." Another person
wrote, "I would like to buy a motor home and travel around the country with my wife
after I retire." One person replied simply, "My dream is to be debt-free."
Unfortunately, fewer than half of those surveyed were
following a financial plan to help them achieve their dreams. Only 40 percent said they
had developed a timeline for saving for their dream, and 48 percent said they had
developed a budget. On the other hand, 72 percent said they had started saving.
Like the person who goes to the airport without knowing the
exact cost of the vacation, people who don't specifically plan to meet their goals may be
in for a disappointment. Fortunately, the rise of "e-advice" (Internet-based
financial advisors) and a continued emphasis on financial education and literacy may help
people become more disciplined savers. These were the conclusions of a panel discussion of
experts and ordinary workers sponsored by mPower in New York on Aug. 2.
The Facts
In mPower's survey of 482 Internet users, only 20 percent
of the respondents said they felt it was "very likely" they would achieve their
life dream. Another 55 percent said it was "somewhat likely." A majority of
those surveyed had not developed a timeline or budget for achieving their dreams.
mPower's findings are in line with the 2000 Retirement
Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), which
found that "many people appear to be falsely confident about their retirement
security." In sum, there's a gap between what people want to do and what they are
doing about it.
The Reason for the Gap
There are several possible explanations, members of the
panel said.
One problem is the sheer volume of financial information
available from many sources, said Dr. Christopher Hayes, a psychology professor at Long
Island University who is the principal investigator of two national research projects
focusing on the baby boom generation and gender investment comparison issues.
"Hearing in the media that you need a million dollars
in order to retire scares the average baby boomer to death," he said.
People need to look at a goal and break it down into
manageable chunks. "Starting (to save) is the most important thing," said Hayes.
People get discouraged because they only look at the end goal and give up. They think,
"I could never do that."
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"We've got to guide people. We've
got to coach them into taking action."
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| — Steve
Deschenes, president of mPower. |
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Dr. Lois Vitt, founding director of the Institute for
Socio-Financial Studies, said that Americans were, for a long time, "taught" to
be dependent on others for their retirement security — namely the government (Social
Security) and/or an employer (company pension). Financial literacy programs are working on
educating people about how to take charge of their finances, but it will take time for
this to work its way through society.
Steve Deschenes, president of mPower, noted that many
people are paralyzed by the fear of doing something wrong. "Eighty percent of people
in 401(k) plans don't rebalance. Why? Because it requires making a new decision, and that
leads to fears," he said.
"That's where an outside advisor helps,"
Deschenes said. "We've got to guide people. We've got to coach them into taking
action."
Possible Solutions
Investment advice and education tailored to individuals and
delivered over the Internet is one solution.
Matthew Fassnacht, J.P. Morgan's senior equity research
analyst for Internet and eServices, recently completed a report that looks at
"e-advice," or financial advice, delivered over the Internet. (mPower, parent company of the 401Kafı,
has provided online investment advice to 401(k) participants since 1997.)
Fassnacht said the economies of scale provided by the
Internet made financial planning advice more affordable for the average person. What's
more, he said, people who might be embarrassed by what they perceive as their own
inadequate financial knowledge might prefer the anonymity of the Internet in seeking
advice or information.
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"E-advice is one of the most
exciting new frontiers in financial services."
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| — Matthew
Fassnacht, J.P. Morgan's senior equity research analyst for Internet and eServices. |
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"E-advice is one of the most exciting new frontiers in
financial services," Fassnacht said.
The key, said sociologist Vitt, will be educating people in
a way that involves "a human element and human encouragement."
Take the case of Randy Smith, a pilot with Southwest
Airlines, a client of mPower. Smith, 42, is knowledgeable about investing, and is eager to
share his knowledge with his co-workers. During "down time" on flights, he said,
he encourages flight attendants and other crew members to save and invest. He has also
written articles about investing that are distributed to the pilots. To catch their
attention, he sometimes uses inside jokes about pilots' money habits. This
"epitomizes the kind of education needed," said Vitt.
What This Means for You
Planning and saving for a major expense like retirement can
seem daunting if you simply look at the goal. Saving for the kind of retirement you have
imagined may seem impossible at first; but after the initial step of deciding exactly what
you want your retirement to be like, you may be surprised at how little you may need to
save every month to meet your goal.
"You have to believe it's achievable. You have to
believe you can do it," said Vitt. Once a person starts saving money and sees how
little they miss it, and how much it grows, they'll be hooked, she said.
Billie Moore, an office and data manager in Chicago, knows
this. Moore, 52, said a former boss and his wife had encouraged her to buy a house early
on, rather than continuing to rent, and helped guide her into saving. Now, she contributes
to a 401(k) plan regularly. "I don't miss the money," said Moore, a panelist at
the mPower discussion. "In fact, I need to do even more."
You might try thinking about retirement saving in the same
way you would approach a successful diet or exercise routine — one step at a time,
and with the help of a friend or two. Are you more likely to jog every morning on your
own, or if you're meeting someone?
The "friend" can be an online advisor such as
mPower, or an online education site like the 401Kafı or IRAjunction. |