Does Understanding the Relation Between Retirement Contributions and Future Monthly Income Encourage Savings?

by Gopi Shah Goda, Colleen Flaherty Manchester, Aaron Sojourner

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The shift toward defined contribution retirement plans has increased the responsibility that individuals bear for their own retirement security. It is not clear, however, whether Americans are able to gauge the savings needed to fund the monthly income they desire in retirement. This study uses a large-scale field experiment to measure how a low-cost, direct-mail intervention designed to inform subjects about this relationship affects saving behavior. Using administrative data before and after the interventions, the study measures the effect of the interventions on rates of participation in retirement plans and the level of contributions to tax-deferred retirement saving accounts. The results suggest that people have difficulty understanding the relationship between the amount they contribute to the plan and their eventual income in retirement. When participants were provided with more detailed projections of retirement income, they tended to increase both their participation and their contributions. Those who were sent income projections along with enrollment information were 29 percent more likely to change participation status. And participants who received the additional information about future income also increased their annual contributions by approximately $150 (an increase of 8 percent) relative to a group that was given partial information.

This issue of Insight summarizes research conducted within the Financial Literacy Center.

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