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Peer Pressure Can Spur Retirement Savings

Author: Andrew Davis

If your friend jumped off a bridge, would you jump off a bridge, too?

What American child or adult hasn't heard this question at least a dozen times from a parent or relative?

The inquiry is intended to teach the importance of independent thinking and judgment. That's a lesson most of us need to learn because humans are social beings and subject to the pitfalls of peer pressure.

Peer pressure isn't all bad, however. When peer pressure causes us to do something smart, like saving more money for retirement, it's a good thing. (See Retirement Planning: Why Plan for Retirement?)

The Retirement Crisis

The media has been reporting for quite a while that most people aren't putting enough money aside for retirement.

Consider the following: Earlier this year, Fidelity reported that by the end of the fourth quarter of 2014, the average 401(k) balance had reached $91,300, a record high.

But according to a recent press release issued by the National Institute on Retirement Security, nearly 40 million U.S. households have no retirement savings at all (see Retirement Savings Levels Continue To Worsen.) When all households (including households with zero retirement savings) are combined, the median retirement account balance is a paltry $2,500, more than a 16% drop from the previous year's median of $3000.

It's a public-policy issue with important implications now and in the future.

Boomers who can't afford to retire are keeping their jobs longer, frustrating Gen X and Gen Y workers alike (some seniors aren't too happy about the situation either and would prefer to stop working). And so it goes down the line: An entire generation may find itself strapped for cash as it relies more heavily on government entitlement programs, such as Medicaid, Medicare and Social Security, than was ever intended (see How Much Social Security Will You Get?)

The problem isn't a lack of intentions. Most people understand the value of saving for retirement and have plans to save more at some future point. Common barriers to increased retirement savings include procrastination, a lack of financial literacy or real blocks like stagnant wages and decreased employer 401(k)/403(b) sponsorship, according to a report from a retirement research center.

All of this is troubling for American workers. The good news? Experts insist that even workers of meager means can begin saving for retirement and that not saving is largely a matter of not developing the habit to save.

That's where, research suggests, good old-fashioned peer pressure can help.

How Peer Pressure Causes People to Save More

A study conducted by Braun Research for Merrill Edge found that 32% of non-retirees have been motivated by financial stress, financial embarrassment or the feeling that they fall short of their peers to make positive financial decisions.

The study comprised a sampling of 1,000 of the mass affluent, defined as those aged 18 to 68 who have between $50,000 and $250,000 in household investible assets. (Curious to know your net worth? See The Complete Guide To Calculating Your Net Worth: Making Accurate Estimates.)

Braun Research wasn't the first to examine this concept. For example, in 2012, researchers at Columbia University, Harvard Business School and the Pontificia Universidad Católica de Chile published a paper titled Under-Savers Anonymous: Evidence on Self-Help Groups and Peer Pressure as a Savings Commitment Device, which examined the effect of peer groups on the savings habits of entrepreneurs in Chile.

According to the research, self-help peer groups are a powerful tool to increase savings (the number of deposits grows 3.7-fold, and the average savings balance almost doubles). Interestingly, a substantially increased interest rate had almost no effect on the participants.

The authors also reported that peer pressure was strongest when peers knew each other, had had past interactions and expected to have future interactions.

Is Peer Pressure Good For Some But Not for All?

Other researchers argue that peer pressure has its limits. A conversation on National Public Radio's "Hidden Brain discussed the surprising results of an employer experiment that used peer influence to increase retirement savings.

When told that 75% of their coworkers had already signed up for the plan, most employees indicated they'd be less likely to join. The researchers postulated that perhaps peer pressure only works when people feel they have a chance to match their peers and that in this case, hearing that most employees had already signed up had a demoralizing effect on the non-participating employees.

Others have pointed out that since the sample wasn't randomly selected (i.e., all the participants worked at one employer), it's not a solid generalization.

The Bottom Line

But the fact remains, peer pressure can have a positive effect on savings habits. Whether motivated by the desire to avoid an unpleasant feeling (such as shame or embarrassment) or by the desire to bond with a trusted friend (as in the Harvard study), individuals who incorporate positive peer behavior into their own habits will likely save more money.

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