Workplace retirement benefits still make long-term savings hard

COVID-19 has thrown a wrench in retirement planning. Rising unemployment, a volatile stock market and economic uncertainty are jeopardizing the ability of many families to plan for the future. However, even before the pandemic, saving for retirement was not easy.

According to a U.S. Federal Reserve report from 2018, one in four non-retired households had no retirement savings at all, and more than 40% of non-retired adults said their retirement savings were not on track. Even for those households with the means to save, employers shifting from defined benefit plans (where they completely pay for and guarantee retirement income) to defined contribution plans (where employees contribute, participation is voluntary and there are no guarantees) made putting money away more complicated.

Read more: 10 key features of a retirement-ready 401(k)

Why? Research has shown that the voluntary nature of these defined contribution plans created room for some common psychological blinds spots to get in the way of saving. For example, studies have found that when it comes to actively managing retirement plans, most people default to not doing anything year after year. Psychologists call this status quo bias, as it is far easier for someone to do nothing, and keep the status quo, than to take action.

Another blind spot is hyperbolic discounting, which occurs when someone puts too much weight on the present when making decisions about their money. As a result, they focus on how much money they have in the short term and tend to save less for the long run.

Both status quo bias and hyperbolic discounting tend to result in mistakes like not saving enough or not saving at all. There are other influences to watch out for as well. My own research has found that mental health issues such as anxiety and depression can decrease a person’s probability of holding a retirement account and a person’s retirement savings as a share of financial assets. These issues also are associated with having less money in retirement accounts and a greater probability of withdrawing from them. This is particularly pertinent today, as the pandemic has intensified depression and anxiety for many.

How can you overcome these influences? Recognizing blind spots can be difficult and even awareness of them is not sufficient to stop their effect on your behavior. The best way to prevent them from affecting your savings and financial future is to put the right processes in place.

If you do not have any retirement savings and you have the option to participate in a voluntary contribution plan through your employer, sign up now. If your employer does not have a defined benefit or defined contribution plan or you are self-employed, you should set up an Individual Retirement Account (IRA) with your bank or another financial institution.

If you already have a retirement account, make it easier to contribute by setting up direct deposits to your account. Making these deposits automatic each month can help you sidestep hyperbolic discounting and other issues influencing how much you save. Your status quo will become regularly putting money away for retirement.

You also want to be wary of making withdrawals. The Internal Revenue Service recently relaxed some of the restrictions and penalties for early retirement withdrawals during the pandemic. However, withdrawing early should be a last resort. These funds take years to accumulate and could take years to replace. If you are nearing retirement, you may not have adequate time to make up for the withdrawal before you retire. Also, unless you are tapping into a Roth IRA that you contributed to with after-tax income, you will owe taxes on the money that you take out.

Following these guidelines can go a long way toward boosting your financial security. Making regular contributions into, and avoiding early withdrawals from, your retirement nest egg not only increases your current balance but also helps your future balance grow exponentially. During tumultuous times, it is easy to discount the future, but now is precisely when you want to start planning ahead.