Visions of early retirement may sway some to save more

Employers looking to spur their employees to save more for retirement might want to consider enticing them with the prospect of retiring early.

It's a motivator that displayed encouraging early promise for the Federal Retirement Thrift Investment Board, the administrator of the federal government's $720 billion Thrift Savings Plan.

In an initiative to coax its participants to contribute more to the plan, the FRTIB last year sent participants personalized communications that detailed how much more they would need to save each pay period to retire one year earlier.

"Who doesn't want to work for one less year?" Elizabeth Perry, a social scientist with the Thrift Savings Plan in Washington, asked rhetorically at Pensions & Investments' Defined Contribution West Conference in San Diego in October, during a panel discussion on ways to maximize participant engagement.

The personalized communication went to roughly 30,000 participants under the age of 55 who were saving less than 5% — or not at all. The estimates of how much more they would need to save in order to work one less year was based on their age and current salary. A 33-year-old participant earning $65,000 per year, for example, would need to save roughly $27 more per biweekly paycheck to replace a year of his or her current salary, according to FRTIB projections.

A preliminary look at the results were encouraging, particularly among participants age 35 and older who weren't contributing. Participants in this group were 8% more likely to start contributing after receiving the outreach, Ms. Perry said in an interview a few weeks after the conference.

"We did see a positive increase, which was exciting," she said, referring to participants who prior to the email had not been contributing to their TSP accounts.

Ms. Perry said the FRTIB did not measure the average increase, focusing solely on whether contributions increased.

"This was an initial, early test to get a high-level sense of effectiveness," she said. "It's a new concept, and we are continuing to think about ways to refine it."

The FRTIB also held focus groups with dozens of participants to get a sense of what they thought about the messaging around saving more to retire early. "In group after group, participants really liked the positive, aspirational tone," Ms. Perry said, adding that the messaging "really caught their attention."

The personalized messaging with estimates of how much more individual participants needed to save was helpful, but more importantly it zoomed in on something that resonated with participants, Ms. Perry said.

"We're all bombarded with information all the time, and part of the way that we figure out what to give our attention to is what feels relevant to us," she said, noting that the pandemic made people value their time more.

Ms. Perry said that the initiative was based on a hunch that "reframing dollar amounts as time" would help sway participants and not on any specific research she is aware of. Some support for the idea, however, can be found in the Financial Independence, Retire Early or "FIRE" movement.

Members of the FIRE community look to save 50% or more of their income so they retire early or otherwise gain the financial freedom they need to pursue the work and interests they love. While numbers on the size of the FIRE community are not easily available, the idea of early retirement as embodied by FIRE devotees has picked up steam with several books on the topic, including "Your Money or Your Life," which became a New York Times bestseller.

Industry experts, nevertheless, are skeptical of the motivational power of early retirement. Not many people aspire to retire early, with most fearing running out of money too early, said Warren Cormier, the Charlotte, N.C.-based executive director of the Retirement Research Center at the Defined Contribution Institutional Investment Association.

"People are discouraged enough with what they have to do to retire at all," Mr. Cormier said, adding that a very high percentage of people are not even going to be ready to retire at 65 or 70.

As a broad-based policy for the defined contribution industry, he did not expect visions of early retirement enticing people to save more.

"It's an interesting concept, but I just haven't seen any research on it," he said.

Wade Pfau, a professor of retirement income at the American College of Financial Services in King of Prussia, Pa., and author of the "Retirement Planning Guidebook," was also skeptical. "There might be an occasional person that could resonate with, but the average response would not be so positive," he said.

Like DCIIA's Mr. Cormier, Mr. Pfau believes that most Americans — already worried about whether they can retire at 65 — would find the thought of having to save more to retire early discouraging.

"If you retire earlier, you have less years of work and savings, less time for your money to grow, a longer subsequent retirement, probably a smaller Social Security benefit, and all that together is just going to raise the cost or retiring pretty dramatically," he said.

Mr. Pfau said the FIRE community would be among the small percentage of people with whom early retirement would resonate.

"You do find occasionally people are hyper savers where they may be saving 50%, 60% or 70% of their salary because they really are motivated to retire quite early," he said, explaining that for some it becomes "a competition on how little they can spend in a year."

Nevertheless, such super savers are "still pretty rare," he said.

Punam Keller, faculty director of the Center for Business, Government and Society at the Tuck School of Business at Dartmouth College in Etna, N.H., also gave the idea a thumbs-down, saying only a very small segment of the population would be able to afford or want to retire early.

Some people love their jobs and don't ever want to retire, while others have their identities "totally wrapped up in work."

They view retirement with a lot of fear and anxiety because "it's like someone is threatening their identity," she said, referring to people who don't love their jobs but nevertheless identify with them.

Others, she said, are struggling to survive and barely making ends meet and can't fathom ever retiring.

The only demographic with whom the idea of early retirement might find an audience is Generation Z, a group that eschews material things and values balanced living, Ms. Keller said.

If early retirement is defined as leaving a full-time job to do something else or have more flexibility in their lives, Gen Z would be interested, she said.

"Their identity is not wrapped up in their jobs," she said.