When it comes to saving for retirement, one question often looms large: How much do I need to save today to live comfortably later?
At Cowry Consulting, our partnership with City University empowers students to tackle pertinent questions like these through their behavioural science research. This year, Alex Tomlins, a City University MSc Behavioural Economics student, conducted important research, funded by Cowry Consulting, into the psychology of pension saving. His survey of 348 participants uncovered interesting insights about how we make decisions about pension contributions and the behavioural biases that shape them.
Here’s what his research revealed:
- The 100*n mental shortcut can lead to unrealistic savings goals
Behavioural science tells us that people often rely on mental shortcuts to simplify everyday decisions - and saving for the future is no exception. This research revealed that individuals used a specific shortcut to decide how much to set aside for retirement. This shortcut was best described as the 100*n rule: people divided their desired pension payout by 10 to estimate how much to save now. For example, if you aim to receive £15,000 in 20 years, you might decide to save £1,500 today.
The problem? This approach often leads to saving far too little. It doesn’t reflect the reality of how much money grows (or doesn’t grow) over time due to inflation and realistic investment returns.
- The further away retirement feels, the less we’re willing to save
When retirement is decades away, people tend to overestimate how much their savings will grow, revealing an optimism bias. Many assume small contributions today will multiply tenfold. As retirement nears, these expectations shrink. The research found that with retirement 10 - 40 years away, people expected savings to grow 10x. When retirement was less than 5 years away, they expected savings to only grow by 2x.
This shows how distance from retirement affects our expectations - and how it can lead to under-saving, especially early on when saving consistently may matter the most.
- Saving a bonus or raise is less painful than saving from regular income
People are more willing to save from a bonus or raise than from their regular salary. Why? It comes down to mental accounting and loss aversion.
We mentally categorise money into different "accounts." Regular income tends to be assigned to essential expenses, so cutting into it feels like a direct hit to necessities. Bonuses or raises, on the other hand, are often categorised as ‘extra’ or ‘treat’ money, making them feel more expendable.
This ties into loss aversion - the tendency to feel losses more strongly than equivalent gains. Losing part of your regular paycheck feels like a painful sacrifice from your core account, whereas parting with bonus money from a discretionary account feels less painful.
The research found that participants expected to be compensated 45% more on average when asked to save from their regular income compared to saving from a bonus. This highlights how mental accounting influences behaviour - and why financial providers should target moments like bonuses or raises to encourage pension contributions when the pain of parting with money is perceived to be lower.
- Framing doesn’t always influence saving decisions
One of the most unexpected findings in the research was that language framing had no impact on willingness to save. The study tested whether describing pension contributions as ‘payments’, ‘savings’, or ‘investments’ influenced how likely people were to contribute to their pensions.
The result? No significant difference.
While framing is often a powerful behavioural science tool to influence behaviour, it didn’t work its magic here. People weren’t swayed by how pension contributions were described. This suggests that language framing isn’t the key motivator - it may be more important to first address wider factors, like timing and ease of saving, to influence saving behaviour.
This finding is a valuable reminder for financial providers to focus on practical nudges and tools to simplify savings, rather than only relying on wording changes to influence behaviour.
What does this mean for the financial industry?
- Simplify the process and clarify realistic outcomes: People often rely on rough mental calculations. Providing easy-to-use tools and clear examples of future outcomes can guide customers towards more realistic savings goals.
- Educate younger savers: Early savers are overly optimistic but may save too little. Targeted financial education can stress the importance of starting early and saving consistently.
- Leverage moments of pay increases or bonuses: Providing information about saving or designing pension plans that let employees automatically save part of their bonuses or raises can be an effective way to increase willingness to save from perceived ‘extra’ income.
By understanding these behaviours, the financial industry can better support individuals in building a secure retirement. It’s about meeting people where they are - whether that’s helping them think beyond their mental shortcuts or nudging them at the right time to save more.