istock retirement

One of the biggest hurdles people face when it comes to saving for retirement is inertia — they want to save but they just haven’t gotten to it yet.

Companies are tackling that by automatically enrolling workers in retirement plans and giving them the option to cut back if they feel they can’t afford it. Still, the efforts might be backfiring in a key way, retirement experts say.

On the one hand, more people are saving. Last year, about 60 percent of the people contributing to a retirement account for the first time were automatically enrolled in the plans by their employer, according to a study by Vanguard.

But many people may be viewing the low contribution rates set by their employers as a cue that they don’t have to save that much. Companies are starting workers off with low rates — often 3 percent — hoping that the modest contributions will keep workers from opting out of the plans. But instead of viewing that as a starting point, some workers are taking the rates set by their employers as a sign that they don’t need to save any more.

It’s the “endorsement effect,” says David Blanchett, head of retirement research at Morningstar Investment Management, who spoke about the issue on a panel about improving retirement security at the annual Morningstar Investor Conference in Chicago.

Research shows that many workers would be willing to stick with their plans even if they were started at much higher rates. About 44 percent of people surveyed by Northern Trust last year said it was either “not too likely” or “not at all likely” that they would opt out of their saving plans if they were signed up to put away 6 percent of their pay for retirement.

Some people might decide they can’t afford to save that much and get out of the plans, but for the people who stay in the accounts, “you’ve just doubled their saving rate,” Blanchett said in an interview with The Washington Post.

It’s usually up to workers to increase those saving rates once their accounts are set up or to sign up to have their contribution rate automatically increased by one or two percentage points each year, Blanchett says. But people may be willing to save even more if their companies automatically signed them up to have their contributions increase each year.

(Northern Trust)

Twenty percent of people said they would save as much as 10 percent of their pay before they would stop the increases. (That’s the minimum amount typically recommended by financial advisers.) Twenty-five percent of respondents said they would save as much as 15 percent of pay before scaling back their contributions.

While workers tend to increase their retirement savings as they get older and make more money, some people may be waiting too long before they start saving substantially. Indeed, most people don’t start saving more than 10 percent of their pay until they are very close to retirement age.

The result is that people are approaching retirement with very little money in the bank. Nearly 20 percent of people near retirement age have no money saved, according to the Federal Reserve. And those who do have savings may not have much. Roughly 10 percent of people age 70 and up have less than $5,000 saved, according to a report released this week by the Indexed Annuity Leadership Council.

To be sure, saving at a low rate is still better than not saving at all, especially for people who start saving early. But as I’ve reported in the past, saving more would give people a better chance of having enough money in retirement. Take a 25-year-old man making $40,000 who hasn’t started saving. Putting away just 3 percent of his pay each year until he is 65 would give him a 50 percent chance of having enough savings in retirement, according to calculations the institute made for The Post. Raise that to more than 6 percent, and his chances go up to 75 percent.

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