The Retirement Plan Cooked up by Two Behavioral Scientists
How you can implement a similar approach to your retirement savings
The 401k perfectly encapsulates the brilliance and flaws of traditional economic models.
- Contributions are tax-deductible
- Investment gains grow on a tax-deferred basis
- Employers typically match a certain percentage of contributions
If used correctly, it’s an incredibly powerful tool to help middle-income workers save for retirement.
There’s only one problem.
It was designed for a “perfectly rational” economic actor. As we know, humans are far from rational, and none of us approach a description of perfectly rational.
But what would happen if you had a workplace retirement savings plan designed by two experts in behavioral science?
People would save a lot more money.
Building a savings plan around your biases
In a 2001 paper, Richard Thaler and Shlomo Benartzi discuss the retirement savings plan they created called “The Save More Tomorrow (SMT) plan.” The plan works within the rules of real-life workplace retirement plans like 401ks — but with a few tweaks…
