By Carolyn Bigda, special to Tribune Newspapers
Saving for retirement when you're in your 20s requires some imagination. You have to imagine yourself in old age, needing the money that you put aside today. You have to imagine the size of your nest egg, a formidable amount. And you have to imagine balancing this need with other important financial goals, such as paying off student debt and buying a first home.
None is easy to do.
But a recent study out of Boston College's Center for Retirement Research says the task is easier if you envision it the right way.
"This doesn't matter as much if the goal is near term," said Nicole Votolato Montgomery, co-author of the study and an assistant professor of marketing at the College of William & Mary's Mason School of Business. "But when I'm thinking about something that will occur long into the future, how I frame the goal really matters."
Think big picture
According to the study, you can think about retirement savings in two ways. The first is big picture: You project the size of the nest egg you need, not the steps you have take to build the savings.
The second approach is more immediate and concrete: How much do you have to save every week, month or year to eventually retire?
Montgomery said most people perceive long-term goals the first way. She likens it to an impressionist painting: When you're far away, you see the picture, not the brush strokes. As you get closer, however, the brush strokes come into focus.
Likewise, a 25-year-old doesn't think of retirement in terms of the bi-weekly contributions he makes to a 401(k) from his paycheck; instead, he thinks of the end result, the total savings he needs to quit work. So if you need motivation, first try imagining the end goal, say, accumulating $1 million.
Set short-term goals
If a long-term outlook doesn't inspire you, try the second option: focus on short-term goals.
"When you're young, it's all about today, not the future. And that's the hard part," said John Pelletier, director of the Center for Financial Literacy at Champlain College in Burlington, Vt.
So now you frame the goal differently: How can you save more to ensure a secure retirement, not why you should save more.
And rather than focusing on the end result — the $1 million — you're thinking about achieving the weekly or monthly goals that will get you to retirement: saving $200 this week, $200 next week.
Be a little fearful
In a separate study, Montgomery also found that when thinking big picture (the first strategy), it's important to cast the right light: Is saving for retirement a way to enrich yourself? Or does it ensure against something negative, such as having to make sacrifices when you're older?
The study found that people were encouraged to save more if the question was framed in the more negative light.
"Even the possibility of not being able to buy luxury goods or having to downsize your home worked," Montgomery said.
Pelletier uses similar fear tactics when he teaches financial literacy seminars to students. He shows the power of compounding and the huge advantage young savers have to grow their money.
"I try to point out that a lot of their parents didn't do their job, and their retirement nest egg is filled with cracked eggs," Pelletier said. "You don't want to repeat that mistake."
Email Carolyn Bigda at firstname.lastname@example.org.
Add up your needs
You can figure out the total savings you need for retirement using the calculator at tinyurl.com/retirementtools. Under the Retirement heading, click on "How much will you need for retirement?"
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