It turns out that we’d all be better off if we let our
robots save for us.
Americans are not saving enough. It’s an under-the-radar
slow-moving crisis that will ultimately explode when Generation X, Y, and the
Millennials begin to retire.
In 2017, the average middle-aged American household had
$250,000 in savings. That sounds reasonable enough, but only because of how the
number is calculated and because of what
factors go into the math behind that number. Averaging creates distortions. If
you have one person whose has set aside
millions for retirement, then that sum alone can make things appear favorable. For example, if four people have no
savings and one person has $2 million set aside for retirement, the average savings is $400,000. Averaging
would, in that scenario, convey the notion that workers were making progress. However, it would hide the fact that 80 percent
of workers had no savings at all.
The Fed’s most recent report on savings tells the story
through many different data points:
One-third of workers with a job (not
self-employed) have no savings at all.
18 percent of households put off dental care
because they could not afford to pay for it (down from 24 percent in 2013).
63 percent of bachelor degree holders and 69
percent of those with a graduate degree, under the age of 29, have student loan
debt. Among those of ages between 30 to 44, the numbers were only
slightly lower: 53 and 67 percent, respectively.
Nineteen percent of individuals over the age of
60 have no retirement savings at all.
56.7 percent of respondents said they if there were
to lose their primary source of income,
they would not be able to cover their expenses for three months – even if the
options include the ability to borrow money. 15.7 percent said that if they had
a $400 emergency expense, paying the cost would necessitate that they did not
pay other bills.
Given these numbers, perhaps it isn’t surprising that 24 percent of people over the
age of 65 are still working.
Most people have no idea how much they need for retirement,
and frequently, they couldn’t say how much they are likely to have given their
current savings trajectory. The ad where the person says his retirement goal is
“a kazillion dollars” is all too true.
The Census Bureau reported that median US household net
worth was $80,039. However, most of that wealth is tied up in the form of equity in real estate.
It’s hard to rely on home equity for retirement, as short of selling a home or
taking out a new mortgage. The alternative – to sell your home, is hardly
advantageous. So while 63.2 percent of households own a home, the rest do not.
While the average equity holding in a personal
residence is $81,000, other people must rent. Not only do they lack
equity, but they will have to continue to make rent payments even after they
The next list outlines the percentage of American households
who hold no wealth in a particular asset class:
Financial assets at a bank: 10.8 percent
A vehicle: 15.3 percent
Home equity: 36.8 percent
401 (k): 59.3 percent
IRA/Keough: 72.6 percent
Stocks or mutual funds: 80 percent
The median value of an IRA/Keough account is $1,100.
The net takeaway should be that any idea that has the
promise of leading to greater wealth accumulation deserves a chance to be
Ever since the de facto retirement plan switched from
“defined benefit,” where the amount of the pension payout is fixed, to “defined contribution,” where only
the amount of the investment is certain,
people have been under-contributing to their retirement.
Perhaps the core problem that must be overcome is this: saving isn’t much fun. It’s not fun, and the
evidence suggests that it’s getting harder and harder to do. Maybe that is
because we now live in a world where technology unites us with an opportunity
to shop throughout our day. It used to be that a person had to seek out a
store. Now, it’s the opposite. We have to resist come-ons all day.
For years, economists have worked from the assumption that
savers were logical individuals who wanted to put their money to its most
responsible use. The economists assumed that individuals would allocate current
and future spending to its best use, given the time value of money and their
lifetime spending needs.
I’m not sure how they managed to ignore what was happening
outside of the ivory tower, but practitioners
of the dismal science did, and as a
result, consumer financial education always had a decidedly judgmental tone. Generally,
mass-market messaging implored people to think long-term about savings. Some
good ideas did materialize – the IRA and the Keough plans. However, it remained the case that underlying
theory assumed that people would put off consumption today to benefit from a reward that wouldn’t come for decades into the future.
The mismatch between these viewpoints and actual consumer
behavior became all too obvious in the latter half of the first decade of this century when subprime cash-out refinance
mortgages enabled millions of Americans to borrowed aggressively to maximize
By 2005, the personal savings rate dropped to its lowest
point since the Federal Reserve began its tracking of the data in 1959. Today, the individual savings rate (2017)
is only 3.4 percent of income. In the sixties and seventies, the national savings rate was almost always higher
than 10 percent. The Fed’s research affirms our own worst suspicions:
even with the additional motivation of real tax savings, only a quarter of
American households have elected to start
an IRA or a Keough.
As our collective
behavior grew demonstrably worse, a new set of academics developed a new school
of thought. It was grounded in a more cynical view of consumer behavior. The
new work reflects three core assumptions about our financial behavior:
Because of problems with our self-control, we
deviate from making optimal choices.
Individuals overweight the benefits of
consumption in the short-term at the expense of their needs in the future.
Consumers have frames for making decisions, and
frequently, they use perceived transaction costs to make choices that are not
rooted in rational thinking.
these economists were thinking about more than making better models. Their work
has always made it a priority to translate research into marketplace solutions.
If it’s hard to save but easy to spend, they contend, then why not look for
ways to reverse the situation? Why not create technologies that no longer
require us to decide to save? Why not
make savings automatic, so that the only way to not save is to step forward to
stop it from happening?
Default retirement plan enrollment: Recognizing
that many employees forget to sign up for their 401 (k) at work, some places
now require a worker to ask to not be on the retirement plan, rather than the
other way around.
Small-dollar, transaction-triggered transfers to
savings: Some banks have developed auto-transfer options inside checking
accounts. If you swipe your debit card, these services will automatically debit
your spending account and transfer the sum to a savings account.
Raises-to-savings: If someone was balancing his or her budget before a raise, it stands to
reason that he or she should be capable
of increasing his or her savings once his or her pay goes up. Richard Thaler’s “save
more tomorrow” scheme lets a worker
designate a ratio of the incremental pay increase to a savings account. By consenting to a system that automatically redistributes
half of the proceeds of a raise to a savings account, a small pay raise can put
a worker on a better savings trajectory.
Categorical saving: Would you feel better if
every time you dropped a few dollars on your favorite vice (cigarettes, lattes,
shoes), you also moved some cash into savings? By watching the bin codes
associated with point-of-sale terminals, some apps will allow a person to
contribute to savings whenever spending takes place within a designated vending
Carrots coupled with sticks: Could we do better at
savings if failing to meet a goal led to a
punishment? Why not strengthen that resolve by creating a penalty for failure? Dean Kaplan like to
create “commitment contracts” that hold people accountable. If they do
something positive, then they receive a reward. If they fail to honor their
commitment, though, they agree to receive a punishment. I.E., Save $1,000 and earn the right to splurge at a restaurant,
but fail and you must perform an unenviable task.
Prize-linked savings: Millions of people play
the lottery, even though everyone knows that the overall rate of return is less
than zero. Research says that a large percentage of Americans believe that
their best chance of creating a retirement nest egg is through the lottery. However, playing the lottery is fun. It’s a lot
more fun than buying mutual funds. Perhaps part of the return is found in the
fun of the scratch-off, and if so, why not reward people with a lottery ticket
when they put money into savings? A caveat to this approach is that it has
legal constraints: banks are not allowed to run lotteries. However, credit
unions have not been held to the same
restrictions, and some now participate in
I believe that most of the winning solutions will rely on
the smartphone. Things go to scale in the US when providers of a product derive
a profit from doing so. It is tough to make
money on a traditional savings account. Most banks look at a savings
account as an add-on service whose costs must be cross-subsidized from the sale
of other services. Regulatory requirements make a stand-alone branch-based savings
program that much more untenable.
The solution will come from mobile because digital technology
reduces marginal operating costs. The provision of an app is almost costless. However, it’s not just the cost of operating an
account. It’s also likely that the
winning behavioral solution will integrate your lifestyle into the act of
savings. The universe of If This Then That ("IFTTT") applets are designed for this possibility. Imagine if you could save set
up your savings app to put a few dollars in your account every time you got a
good night’s sleep? Integration between a
savings account and a fitness tracker would make that possible. Buy a beer?
Integrate with Untapped and it becomes a
new habit. Send a tweet – IFTTT = savings.