Why retirement calculators fail the people who need it most — and what to do about it

Have you ever tried using a retirement calculator?

Did you use it and then increase the amount you were saving for retirement?

Or were you overwhelmed by the steps and questions so you only increased the amount you were saving by a little bit—or not at all?

Well, if you fall into the latter category, don’t feel so bad.

A new study shows that employees with greater financial knowledge increased the amount they were saving for retirement more than those with lesser financial knowledge. In the study, federal employees invited to use an online retirement savings tool increased the amount they were saving for retirement by $174 annually, but those who were financially capable increased the amount they were saving for retirement by $412 annually.

The authors of the study concluded this: Online calculators work well for workers who are well-informed, educated, financially literate and are already contributing a lot to their retirement plan.

Read: I tested 2 free Social Security retirement calculators, and here’s what I found

A different solution is needed for workers with lower financial capability. “To help employees with lower financial capability, online tools may require better automation whereby the fields in the online tool are auto-populated by the employee’s administrative data,” wrote the authors of the report (Are Retirement Planning Tools Substitutes or Complements to Financial Capability?). “Such integration would lead to fewer steps, less reliance on financial language, and less need for employee self-knowledge.”

What’s more, the authors noted that “more expensive forms of intervention, such as one-on-one sessions or personalized materials, may be necessary to help those with lower financial capability” save more for retirement.

Read: I’m 62, single and never had a retirement account. I have $100,000 to invest, but is it too late?

In an interview, two coauthors — Joshua Tasoff, an associate professor in Claremont Graduate University’s Department of Economic Sciences, and Jiusi Xiao, a Ph.D. student in economics at Claremont Graduate University—discussed the study.

Read: Reset your retirement calculator now for today’s bleaker stock markets and make sure you’re still on track

Figuring out how much to save for retirement is a complex problem that, in the era of 401(k) and similar employer-sponsored retirement plans, largely falls on the individual. And figuring out how much you should save in any given year requires multiple inputs and a deeper level of financial awareness: your expected rate of return, your risk tolerance, time to retirement and time in retirement, other sources of retirement income, and the list goes on.

In the study, the authors worked with the U.S. Office of Personnel Management (OPM), which manages the U.S. civilian service and which, like many employers and policy makers, was grappling with the question: How do you help workers make good decisions for their retirement savings?

“It is widely believed by many economists that people don’t save enough for retirement,” said Tasoff. “It’s a very challenging problem.”

Read: Many young people shouldn’t save for retirement, says research based on a Nobel Prize–winning theory

It’s a problem in large part because there isn’t an opportunity to get feedback and learn from your mistakes. You don’t get a do-over. You don’t get a chance to go back in time and save more if you didn’t save enough at the start. And given that people are prone to making mistakes when it comes to saving for retirement, this can be a big problem.

“When it comes to retirement savings, even though you do it over the course of a life, you only actually retire once,” said Tasoff. “You only have one lifespan to live…for the most part you actually only get to try this once.”

In the study, the authors sought to examine the effect of online retirement calculators and two specific biases; exponential growth bias, which is the notion that people neglect compound interest and, hence, underestimate how rapidly assets grow, and present bias, in which people value more an immediate outcome than one postponed in the near future and do so in a way that reflects a self-control problem. They also sought to examine financial literacy.

Read: How to choose which Social Security calculator to use

To examine these effects, the researchers invited half of the OPM workers in the randomized study to use a new, fully functional new online calculator and half to use a calculator that did everything the fully functional calculator did except calculate what a participant’s nest egg would grow to.

“We wanted to see if specific calculations were getting in the way and wanted to see whether specific calculations were getting in the way of people’s decision to save more for retirement,” said Tasoff.

First, the researchers sent an email inviting those being studied to use the calculators. And they found this correlation: Those contributing more to their retirement savings were more likely to click on the link to the calculator. And that’s the opposite of what the researchers hoped would happen. They hoped those who are less financially capable would click on the link. But that’s not what happened. 

“This is our first indication that maybe it’s going in the other way, because the people who are clicking the link are the people who are already contributing more,” he said.

Next, the researchers examined the people who clicked on the link to the calculators. They found those using the fully functional calculator, the one that showed what someone’s retirement savings would grow to, saved $174 more per year than those who didn’t learn what their savings would grow to.

Then the researchers discovered how much more those with greater financial knowledge and those with greater financial capability saved after using the calculator. And that group saved, as mentioned, an additional $411 per year.

So, what are some of the takeaways?

Providing exponential growth information to those who would be helped the most by such information doesn’t change how much they are saving for retirement. In fact, the researchers learned that “there’s probably a minimal level of competency” required just to use the calculator, said Tasoff.

That’s not to say retirement calculators don’t work. But these tools, at least in workplace plans, need to be tweaked for those with less financial knowledge. Maybe the calculator needs to have fewer steps and ask fewer questions. 

“We need to keep in mind that there is a barrier to using those tools,” said Xiao. “And then, maybe, there are better ways or more accessible ways to design these tools so that it not only benefits the more financially literate user, but everybody.”

And then, there’s the more expensive though likely quite beneficial intervention. Those less financially literate could benefit, perhaps greatly, from one-on-one in-person meetings with a financial professional in the workplace.

Remember, said Tasoff, it can be intimidating for someone with less financial knowledge to use a calculator that’s asking for all sorts of inputs about inflation rates, capital market expectations, asset allocation, time horizon, risk tolerance, investment goals, salary growth, and which funds to invest in. 

“It requires specialized skills and there’s a lot to learn,” said Tasoff.

But there’s a big intimidation factor, he said. So, then you procrastinate. You’ll do it later. Then time goes by, and you don’t do anything. “Procrastination, in this area, leads to large losses,” said Tasoff.

To be fair, the losses aren’t as bad given that so many workers are auto-enrolled into their 401(k) plans. But it’s also likely that many are not taking full advantage of their employer’s match nor calculating how much they should be saving given their retirement income goals, he said.

So, the bottom line is this: If you’re financially literate, calculate away. You get it. But if you are not so financially literate perhaps the best thing to consider is using a real person to help figure out what you should be doing with your retirement. And the cost of that is far less than the cost of getting it—the amount you need to fund your desired lifestyle in retirement—all wrong.

Do you have questions about retirement, Social Security, where to live or how to afford it at all? Write to HelpMeRetire@marketwatch.com and we may use your question in a future story.

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