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A unique combination of psychology and technology might be just the ticket for getting investors to start taking their retirement savings more seriously.
Speaking last Monday at the
InvestmentNews’ annual Retirement Income Summit in Chicago, Hal Ersner-Hershfield, a postdoctoral fellow and visiting assistant professor at Northwestern University’s Kellogg School of Management, illustrated how individuals generally take their future more seriously when they can imagine themselves as an older person.
SELF AS A STRANGER
“People tend to make decisions for immediate gratification because they are treating their future self as a stranger,” he said.
Mr. Ersner-Hershfield used the example of a teenage boy smoking cigarettes because he is unable to imagine realistically the effects of long-term smoking on his body.
This is the same mindset, he explained, that helps justify why half the people in the country have just $25,000 saved for retirement and why a third of them have less than $1,000 saved.
To help remedy that gross shortfall in retirement savings, Mr. Ersner-Hershfield has developed a program that creates images of what people will look like in 30 or 40 years.
While the financial services industry for years has promoted savings calculators and estimates on retirement income needs, it turns out that seeing an image of yourself at an advanced age helps make imagining getting older a reality.
In his research, Mr. Ersner-Hershfield applied aging-avatar images of individuals to their perspectives on spending and saving money.
“The more similar people felt to their self in the future, the more assets they wanted to save,” he said. “And we found that the more the future self looks like a different person, the worse we are at saving behavior.”
Mr. Ersner-Hershfield even tweaked the research to alter the expression of the avatar so that poor-savings-habit responses would cause the avatar likeness to frown.
“The objective is to give people vivid examples of their future self,” he said.
Susan Carr-Templeton, founder of Stafford Wells Advisors Ltd., tested the technology on some of her clients.
“I think it would be great for 401(k) plan participants or some young people like athletes who are making a lot of money,” she said.
The technology is at least six months from being developed for practical use, according to Mr. Ersner-Hershfield.
“We envision it starting as more of an institutional thing that starts at a company like Fidelity [Investments] or something like that,” he said.
NO COST ESTIMATE
Mr. Ersner-Hershfield added that it is too early to guess what it might cost for an adviser to gain access to the technology.
“The idea is to make financial education more engaging and more fun,” he said. “The research shows that whenever we see an image of ourselves, even as a reflection in the mirror, we behave better.”
While the technology might not be available yet, Ms. Carr-Templeton said there are techniques that can be used right now to help clients think more seriously about their retirement future.
“I ask clients to visualize where they will be when they retire,” she said. “I ask for specific details about where they will live and what it will actually cost to live there.”
Of course, she added, being able to show a client an avatar image of what old age will look like “could make an adviser unique.”
