Reducing Expenses to Face the Future: Exploring Lay Theories About Wealth Creation in Retirement Allocations

In a world where financial security during retirement is becoming increasingly uncertain, understanding how individuals make decisions about their retirement savings is crucial. In the United States, for instance, a significant portion of the population approaches retirement age without adequate savings. Data from the U.S. Census Bureau reveals that a staggering 50% of women and 47% of men between 55 and 66 years old have no retirement savings. This financial insecurity is not unique to the U.S. but is a global issue, with many individuals fearing they will outlive their savings. The transition from employer-provided pensions to personal savings accounts for retirement underscores the need for individuals to take charge of their financial futures. In our research, “Reducing Expenses to Face the Future: The Role of Lay Theories About Wealth Creation in Retirement Allocations,” we delve into the psychological factors that influence how people allocate money towards their retirement.

Understanding Lay Theories About Wealth Creation 

At the core of our research is the concept of “lay theories,” which are common-sense beliefs that people hold about various aspects of life. These theories act as mental frameworks that help individuals make sense of the world around them. For instance, a common lay theory in education is that intelligence is fixed and cannot be changed, while another theory posits that intelligence can be developed through effort and learning. These lay theories significantly influence how people approach learning and challenges. 

In the context of wealth creation, we identify two primary lay theories: the income lay theory and the expense lay theory. The income lay theory posits that earning more money is the key to wealth accumulation, while the expense lay theory suggests that spending less is the primary driver of wealth. Although both theories hold some truth, we theorize that people who primarily endorse the expense lay theory will allocate more money towards retirement than those who endorse the income lay theory. We believe that this occurs because the expense lay theory aligns more closely with a future-oriented financial mindset, encouraging individuals to think long-term about their financial well-being. 

Empirical Evidence on Retirement Savings Behavior 

To explore how these lay theories influence retirement savings behavior, we conducted ten studies. These studies collectively offer a comprehensive look at how the accessibility of these lay theories impacts retirement allocations. Our research utilized a mix of large-scale surveys and controlled experiments to ensure robust and generalizable findings. 

In one of our large-scale studies, we analyzed data from the Consumer Financial Protection Bureau (CFPB) Financial Well-Being Survey, which included responses from over 5,000 individuals. We identified participants who prioritized reducing expenses as a wealth-creation strategy and compared their likelihood of having a retirement account to those who prioritized earning more money. In the CFPB survey study, those who believed that reducing expenses was the primary way to create wealth were 19.1% more likely to have a retirement account compared to those who did not. This significant difference held even after controlling for various factors like household income, liquid savings, and financial knowledge. 

We also conducted several controlled experiments to test our hypotheses in different contexts, using a mix of online participants recruited from Connect by CloudResearch (low attention check failure rate) and university students.

For example, in one experiment, participants were recruited via Connect and were asked to imagine receiving a monthly salary increase of $500. They were then asked how much of this raise they would allocate to a retirement fund. Participants who endorsed the expense lay theory allocated significantly more to their retirement fund than those who endorsed the income lay theory. This finding was consistent across different income levels and levels of financial knowledge indicating that the lay theory itself was a significant predictor of retirement savings behavior. 

Another study involved participants imagining they received a $1,000 windfall. They were then asked how much of this windfall they would invest in a retirement fund. Again, those who endorsed the expense lay theory allocated more to retirement savings than those who endorsed the income lay theory. This suggests that the tendency to prioritize reducing expenses over earning more money leads to more prudent financial decisions regarding retirement. 

Practical Implications for Financial Planning 

The implications of our research are profound. By understanding the lay theories that individuals hold about wealth creation, policymakers and financial educators can better tailor their messages to encourage retirement savings. For instance, framing financial advice in terms of reducing expenses rather than increasing income might resonate more with those who naturally lean towards the expense lay theory. 

Moreover, our research highlights the importance of future financial orientation. When people think about their future selves and the long-term benefits of saving, they are more likely to allocate funds to retirement accounts. This insight can be leveraged to design interventions that enhance the accessibility of the expense lay theory, thereby promoting better retirement planning. 

Conclusion 

In summary, our research sheds light on the psychological underpinnings of retirement savings behavior. By focusing on the lay theories about wealth creation, we can better understand and influence how individuals prepare for their financial futures. As we continue to navigate the complexities of financial planning, these insights can help ensure that more people can retire with dignity and security.