A picture of how investing through a defined contribution program similar to the TSP will translate into income at retirement is a stronger motivation for people to invest than is general retirement information or even projections of how their accounts might grow, a study has found.
The findings call into question the usefulness of the traditional approach of focusing on potential size of accounts at certain future dates under assumptions about amounts, time periods and rates of return, in favor of focusing on the payoff in income later on.
The study by the Center for Retirement Research divided a study group of 17,000 public employees into four groups: one a control group; a group given general information on saving for retirement and a step-by-step guide for signing up or changing contributions; a group shown how hypothetical contributions would translate into account balances at retirement; and a group given age-specific projections of how the additional contributions would increase retirement income.
Compared with the control group, the group given information on income increased their savings by 1.2 percent of salary on average, while the other two groups did not make significant changes in their savings.
Focusing on post-retirement income “had a beneficial, and statistically significant, effect on knowledge and confidence. Compared to the con¬trol group, the income group reported less difficulty finding information about how much to save for retirement and being better informed about retire¬ment planning than they were six months prior. They also reported being more certain about their expected retirement income and more satisfied with their financial condition,” the study said. “The income treatment works, in part, by boosting individuals’ knowledge and confidence.”