The real reason we don't save for retirement

Why aren't people saving for retirement? If you ask them, they'll say they need to buy a house first, or pay off debts, or that they don't earn enough to live on, let alone save. Of course, all these things play their part, but none would be a good enough excuse if it wasn't for the one underlying reason that people don't save for retirement. It's a reason that affects us all.

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Failure of imagination

The fundamental issue is that psychologically we are not equipped to imagine retirement, because only today matters to us. It's known as cognitive short-sightedness, and it can be seen in humans from a very early age. What happens if you give a small child a biscuit and tell them they can eat it any time before lunch - but that once they have eaten it, there won't be anything else? They'll eat it immediately and ask for another.

Throughout the ages, when life was more fragile, prioritising today was the only way to get through the day in one piece. There was no need to think long-term, because you'd be dead by 40 - unless something killed you off sooner.

Now, of course, our circumstances are very different, but our psychological capability for imagining the future is the same.

Intellectually we all know we will get older, but the idea isn't actually real to us.

We don't want to think about it, but when we force ourselves, we end up thinking of an entirely different person in a time that's totally removed from now. It's no wonder we don't want to make sacrifices today to help that stranger.

Alternatively, we look around us, and extrapolate from the kinds of lifestyle that baby boomers currently enjoy - and are lulled into a false sense of security.

The impact

This has three effects. The first is that we prioritise our needs now over our needs in the future. So, for example, we argue that having a smartphone, pay TV and wifi are essential for life now - so we cannot give them up and spend the money we save on a pension. However, by prioritising those things now, we are failing to save enough to ensure we will be able to afford them in retirement.

Second is that we prioritise our time now over our money in the future - arguing that we don't have time to complete the paperwork to save more for the future.

And third is that we make poor predictions about what our future selves will need, so we fail to plan for the kind of lifestyle we will arrive in retirement expecting. This kind of thinking can be seen when we're thinking a year ahead - let alone any further. Take gym membership for example: every single person signing up for a year thinks they will go often enough to make membership worth the money. In reality only 30% of people will.

The solution?

Pension companies, have been hard at work to try to close the imagination gap. In October Aviva got the ball rolling, with adverts where two people were aged prosthetically, and tried to live on the money their current pension savings might allow them. This sat alongside an online tool designed to give people an insight into what their future might look like.

Now Zurich has launched FutureYou, a dashboard and range of tools, which includes an online tool where people can play 'Picture This'. This will apparently help them visualise the retirement they expect, before establishing the money they will need to save for it, and the actions they need to take today to achieve those savings. This was designed around their findings that people who have specific aspirations for retirement are nearly twice as likely to save than those who don't.

The jury is out as to whether these approaches will help retirement feel real to people, or whether we will keep on living for today.

Fortunately, while we're busy making bad decisions, the government has been rolling out auto-enrolment, to ensure that despite our failures of imagination, we do somehow end up with some retirement savings after-all.