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Article Excerpt
This research examines potential explanations of why consumers have difficulty making personal financial decisions that will be most beneficial in the long run. Within the decision context of retirement savings, results from an experiment suggest that self-regulatory state, future orientation, and financial knowledge can influence consumer evaluations and intentions related to retirement investments (i.e., a 401(k) plan). Findings suggest that consumers who express higher levels of future orientation are more likely to participate in a retirement plan, an effect moderated by self-regulatory state. Results also suggest that financial knowledge and orientation toward the future can interact to influence the likelihood of 401(k) plan participation. Among consumers with a basic level of financial knowledge, future-oriented consumers expressed a greater likelihood to participate in a retirement plan than less future-oriented consumers. However, in the absence of knowledge, consumers' orientation toward the future did not influence the likelihood of 401(k) plan participation.
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Offspring of the baby boomer generation (i.e., echo boomers) are the largest generation of Americans to emerge since the 1960s, numbering over eighty million (CBS News 2005). This large cohort is gradually coming of age at the same time as baby boomers are retiring or considering retirement. It is no wonder that long-term financial decision making has been such a hot topic in the media as of late with important implications for both individuals and society (Investment News 2007; Lira 2006). In addition to an aging population, researchers have noted a recent shift in how much money American consumers are willing and able to save for their retirement. For the first time since the Great Depression, overall consumer savings rates are negative (-0.4% in 2005 and -1.1% in 2006). These numbers are down sharply from the average savings rate during the mid-1990s (+4.6%; Crutsinger 2007). Although there are a number of macrolevel, "uncontrollable" economic factors that account for this troubling trend (e.g., rising energy costs), some experts have noted consumers' general tendency to opt to spend, as opposed to save, discretionary income. For instance, David Wyss (2007), Chief Economist at Standard and Poor's, has publicly stated that "Americans seem to have the feeling that it is wimpish to save" and that "the idea is to put away money for old age and we are just not doing that."
There are numerous long-term risks consumers face when they do not adequately save for retirement. Lack of financial resources during the later stages of one's life cycle can have devastating effects on consumer health and welfare (Kozup, Pagano, and Creyer in press). To compound the problem, many question whether or not the current Social Security system will be capable of providing an adequate level of financial support for retiring consumers into the future given the unprecedented strain that baby boomers are expected to place on the American health care system (Bethell 2005). Even if the current Social Security system is modified so that it can provide support to aging consumers, this system provides only a portion of the income that consumers earned before retirement. The uncertainty regarding government support in the form of Social Security coupled with the trend of Americans living longer strongly suggests that most echo boomers will require additional income for many years after they have stopped working (Boyles 2006). The importance of retirement savings in early life stages is critical, and thus, it is imperative for young adults currently entering the workforce to consider the potential long-term consequences of their current spending and saving habits.
Given the importance of financial decision making and planning for the long term, the objective of this research was to examine important factors that influence consumers' evaluations and decisions related to saving for the distant future. Within the context of retirement savings, we examine how self-regulatory state, future orientation, and financial knowledge can impact evaluations of and decisions regarding investments related to retirement planning.
BACKGROUND
One of the most-popular ways for consumers to save for the future is to enroll in a 401 (k) plan (Obringer 2007). A 401(k) plan is a specific type of employer-sponsored retirement plan that enables employees to save for retirement while deferring income taxes on the saved money and earnings until they are withdrawn. Typically, a portion of the employee's wage is withheld and paid directly into the 401(k) account. In the most-common type of plan, the employee can choose to invest in a variety of different funds. The long-term benefits of a savings plan are clear; however, the benefits are multiplied when the employer matches the individual's contribution. Consider a typical 401(k) "matching" plan offered by many firms, say, for every $1.00 invested by the employee, the firm provides a $0.50 match (up to 6%) of the total annual salary. In this case, if an employee earns $40,000 annually and contributes 10% of his or her salary ($4,000) to a 401(k) plan, the employer will provide an additional $2,000 for a grand total savings of $6,000. Typical drawbacks associated with 401(k) retirement plans include steep penalties associated with the early withdrawal of funds and forgoing spending in the short term. Money that is invested each week (or month) in a 401(k) plan is not available for things such as day-to-day living expenses, family vacations, or unanticipated "rainy days."
Despite the benefits of saving for the future, a significant percentage of people choose not to adequately save for long-term needs or have unrealistic retirement expectations such as overly optimistic expected returns on their investments or heavy reliance on state and/or workplace pensions (Sharp 2007). Outside of uncontrollable, external constraints on discretionary income (i.e., the amount of money leftover after basic needs such as food, clothing, and shelter have been satisfied), there are many potential explanations as to why consumers fail to adequately save for retirement. One popular framework to examine why consumers opt to spend today versus save for tomorrow is intertemporal choice (i.e., decision making over time; Loewenstein, Read, and Baumeister 2003). Many difficult circumstances could be avoided, such as financial hardship, if people simply made more careful, deliberate choices that match in accordance with their long-term best interests and goals. Of course, this is not an easy thing to do. Most consumers have made decisions at some point in their lives that seem reasonable in the short term but result in negative outcomes in the future. For example, having one too many drinks when out at a work happy hour could possibly have the negative effect of a hangover the next day. Although these types of decisions can be harmless in isolation, they also have the potential to lead to severe negative consequences over time--alcoholism, drug abuse, obesity, and/or personal bankruptcy are a few examples of these potential long-term negative consequences.
Self-regulation is a psychological process that plays a significant role in determining how individuals respond to choices with intertemporal consequences and can be defined as the process through which people exert control over their thoughts, feelings, and behavioral impulses (Baumeister et al. 2006). In order...
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