A unique combination of psychology and technology might be just the ticket for getting investors to start taking their retirement savings more seriously.
Speaking Monday at the Investment News Retirement Income Summit in Chicago, Hal Ersner-Hershfield, postdoctoral fellow visiting assistant professor, Kellogg School of Management at Northwestern University, illustrated how individuals generally take their future more seriously when they can imagine themselves as an older person.
“People tend to make decisions for immediate gratification, because they are treating their future self as a stranger,” he said.
He used the example of a teenage boy smoking cigarettes because he is unable to realistically imagine the known 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 the population has less than $1,000 saved for retirement.
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 has for years promoted savings calculators and estimates on retirement income needs, it turns out that seeing an image of yourself at an older age helps make 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.”
He even tweaked the research to alter the expression of the avatar so that poor saving 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 or something like that,” he said.
He added that it is too early to even guess at 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 very unique.”
Picture yourself in retirement.
For people who are many years from retirement, it's a hard thing to do. But helping investors visualize themselves in their golden years might get them to save more.
That is the surprising conclusion of Hal Ersner-Hershfield, an assistant professor at the Kellogg School of Management at Northwestern University. At InvestmentNews' 2011 Retirement Income Summit, Mr. Ersner-Hershfield talked about research he conducted that creates digital images from photographs of test subjects and artificially ages the images to about 65. In experiments, people who saw their retirement-age image said they would set aside more than people who did not get to see their older self.
“People have a hard time understanding the consequences of decisions they make today,” Mr. Ersner-Hershfield said at the conference. To many people, their “future self” seems like a stranger, particularly if retirement is many years away, he said.
In the experiment, which used college student test subjects, those who saw their retirement-age image put twice as much into a hypothetical savings account than those who saw themselves as they were that day.
Mr. Ersner-Hershfield said that the goal of his research is to help counter what he calls a “chronic undersaving” problem that can't be explained by cash flow problems or inability to set aside more.
“The future is hard to think about,” he said. The aging digital image is designed to help people see themselves as retirees and feel an emotional connection to themselves at an older age.
As to whether the technique would work in the real world, Susan J. Templeton, founder of Stafford Wells Advisors Ltd., said she tried the technique with a 36-year-old female writer who is a client, and the sight of herself as a 65-year-old did prompt her to say she would put more money into retirement savings.
Prof. Hal Ersner-Hershfield of Northwestern University talks imaging
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