Although the majority of Canadians say they plan to invest in a retirement plan this year, most won’t follow through on those good intentions, according to a recent report from Canadian Imperial Bank of Commerce (CIBC).
Although 60% of those polled say they will contribute to an RRSP or tax-free savings account this year, the CIBC report notes, historical data suggest that fewer than half that number will actually do so. What’s worse, the number of people taking money out of their retirement savings prematurely is actually rising.
Looking for strategies to help reverse this trend, the Center for Retirement Research (CRR) at Boston College recently conducted a study to see if providing individuals with detailed projections might produce improved savings rates and, by extension, greater financial security in retirement.
The study, entitled Do Income Projections Affect Retirement Saving?, looked at a large group of employees at the University of Minnesota who have access to employer-sponsored retirement plans in which employees can make voluntary, tax-deferred contributions.
The CRR study looked at the effect of providing workers with age-specific projections of the additional retirement income they could get if they were to make additional contributions into the employer-sponsored plan.
The employees were divided into four segments: a control group and three treatment groups, each of which received different messages.
The “planning treatment” message provided general information on saving for retirement and a step-by-step guide for signing up for or changing contributions to the pension plan.
The “balance treatment” message added age-specific projections of how additional contributions would translate into greater balances at retirement.
The “income treatment” message added age-specific projections of how the additional contributions would increase the retirement income that participants could expect from the plan.
The researchers, led by Stanford University professor Gopi Shah Goda, then tracked the effect on saving by measuring whether employees made any change to their contributions within six months.
The CRR study found that the income treatment message had a statistically significant effect on the likelihood that plan participants would change both the frequency and the amount of their contributions.
Compared with the control group, individuals in this group were 1.2 percentage points more likely to take action during the six-month followup period.
This group, as a whole, increased its saving by an average of $85 more than the control group. However, those in the group that received the income treatment message who actually made any changes increased their savings by a much larger amount – about $1,150 more per year.
Individuals in the other two message groups also were more likely to save more, albeit in relatively small amounts.
Says the CRR report: “This finding suggests that it was not the income projections alone, but the combined effect of providing retirement-planning information along with the balance and income projections that encouraged the increase in saving.”
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