Individual differences in retirement savings: The role of future self-continuity and numeracy

Worldwide, life expectancy is increasing while birth rates are declining resulting in an increasing proportion of older adults in the population. Furthermore, increased life expectancy has not been reflected in a proportional increase in the average retirement age, resulting in a growing number of individuals relying on nonemployment sources of income. Older adults today are living 4 years longer after leaving the workforce compared with the 1980s. During this same time period, responsibility for financially preparing for retirement through tax advantaged plans largely shifted from employers (e.g., defined benefit plans like pensions) to the individual (e.g., defined contribution plans like 401(k) or IRA). This change has left retirement savings susceptible to individual differences in the management of and contributions to retirement plans. Testing the Behavioral Life Cycle Hypothesis using multiple surveys from the RAND American Life Panel, we evaluated the combined influence of numeracy, the ability to understand and work with numbers, and future self-continuity (FSC), the psychological feeling of connectedness to the future self, on retirement savings. Using a two-part model to account for a majority of individuals reporting no retirement savings, we found that numeracy predicted unique variance in the probability of having retirement savings and that FSC significantly predicted unique variance in the magnitude of retirement savings for those that reported a nonzero balance. In partial support of our predictions, numeracy appeared to play an important role in the decision to begin to save for retirement while FSC served to motivate individuals to increase overall savings.