It’s All About the Frame

It would be nice if we could make all of our decisions using only rational analysis. Unfortunately, human beings aren’t wired that way. Emotions, habits and cognitive biases play an outsized role in how and what we choose—particularly when it comes to money.

Economists have only recently come to acknowledge the complexity of financial decision-making. Saving, spending, investing and financial planning tend to induce fear and other negative feelings that impede most people’s ability to make good choices.

But there’s another side to financial biases: Once you become aware of them, you can use them to your advantage. That means employers have an enormous opportunity when they communicate with employees. When they consider how people really think about money, plan sponsors can frame retirement savings options in ways that encourage positive choices. Read more about saver biases and how to combat them in our new white paper, “The Road to Retirement Success.”

A new way to frame retirement savings

Historically, the retirement industry has asked people to start their planning by thinking about the lump sum they’ll need to cover their expenses in retirement, taking into account inflation, potential investment returns, life expectancy, health concerns and other factors that are hard to predict and in some cases frightening to contemplate. Compounding matters, savers are expected to work toward their ultimate goal in tiny increments that can seem disconnected from the enormous figure they’ve calculated.

Trouble is, focusing on a specific future dollar amount—and the gap between that number and current savings—can induce feelings of fear and helplessness. What’s more, a single extremely large number is too abstract to have much relevance in terms of our day-to-day lives. (Just think about how much we focus on literally nickel-and-dime changes in gas prices, and how little we think about the effect of fuel efficiency on how much we’ll spend on gas over any one particular vehicle’s lifetime.)

There’s a better way to frame retirement savings. When employees think of their savings as the source of a future paycheck—a way to replace the monthly income they’re earning now—the goal starts to feel more achievable and becomes far easier to comprehend.

Of course, estimating the future income stream that retirement savings will produce takes some very complicated math. We can’t expect participants to do those calculations themselves. Fortunately, digital tools are beginning to appear that can illustrate employee savings as future monthly income, helping employees focus on where they are with their savings rather than where they aren’t. This is why our website for savers revolves around projected monthly income.

An ethically significant act

Framing can nudge people into making certain decisions. It’s a big responsibility. And when the retirement industry frames retirement in positive, concrete terms, our goal is to help people lead richer, more secure lives.