“Financial well-being underlies well-being in all other domains of well-being (family & friends, work & activities, mental & physical health), and well-being in each domain is impossible without financial well-being,” says Meir Statman (2024) – founding father of behavioral finance. At everyoneINVESTED, we want to contribute to a more resilient, fairer society by making financial well-being accessible to all by engaging younger generations in retirement planning.
In recent years, the accessibility of investment services has drastically improved. One reason is the rapid growth in financial technology; everyone carries a financial advisor in their pocket. Equally important is the content-driven innovation in behavioral economics and choice architecture, which helps understand people’s intent and anticipate their behavior. The combination yields digital engagement techniques that can improve well-being, much like a dentist delivers information and easy-to-use products that promote oral hygiene (see Keynes (1932) comparing economists to dentists.
There is a growing concern that many people may not save adequately for retirement, risking outliving their financial wealth. Governments typically encourage retirement contributions through favorable tax treatments and subsidies. Yet, engagement techniques introduced by behavioral economics, like default setting and automatic enrolment, have been shown to outperform the impact of financial encouragement. Most famous is likely the SaveMoreTomorrow program of Nobel laureate Richard Thaler and Shlomo Benartzi, where participants pre-agree to allocate future wage increases to their retirement. SaveMoreTomorrow is most effective in countering the tendency to procrastinate. The impact of this famous nudge can be monitored online at www.shlomobenartzi.com/save-more-tomorrow
Digitization enables the expansion of retirement awareness and contribution reach even further. At everyoneINVESTED, we ensure this translates into easy-to-use applications built on sound methodologies for investor protection, as recently documented in Dennie van Dolder and Vandenbroucke (2024). The evidence is growing that digital engagement techniques lead to more and better retirement contributions, ensuring that these contributions are managed wisely throughout retirement. Watch our on-demand webinar on the topic featuring Milo Bianchi (available here), where we delve into the latest trends in digital engagement and their impact on retirement savings or read Daminato et al. (2024).
While we have so far emphasized the need for retirement contributions, it is equally important to use the money wisely once retired. Digital engagement also has a role to play here. This goes beyond the standard financial advice to best manage a lump sum portfolio. The challenge is to offer an optimal financial planning decision framework that extracts income to balance the desired living standard with life expectancy. Alternatively, a government may favor taking up retirement plans as an annuity rather than a lump sum, attempting to socialize longevity risk.
Our mission to get everyone invested fully aligns with the need for a sustainable pension system. To many people, their retirement plan is the only investment they have. We consider it an excellent opportunity to make financial engineering contribute to individual and societal well-being.
About the author:
Jurgen Vandenbroucke, PhD, Managing director, everyoneINVESTED , the wealth tech spin-off of KBC Group Expert general manager at KBC Group, Lecturer in financial engineering at the University of Antwerp Lecturer in digital household finance at KU Leuven
Relevant readings that inspired this contribution:
Chetty, Nadarajan (2015), “Behavioral Economics and Public Policy: A Pragmatic Perspective,” American Economic Review Papers and Proceedings vol. 105 n°5, pp 1-33.
Daminato, Claudio, Filippini, Massimo and Fabio Haufler (2024), “Digitalization and Retirement Contribution Behavior: Evidence from Administrative Data,” Review of Financial Studies vol. 37, pp 2510-2549.
Keynes, John Maynard (1932), “Economic possibilities for our grandchildren,” in Essays in Persuasion.
Statman, Meir (2024), A wealth of well-being. A Holistic Approach to Behavioral Finance. John Wiley & Sons.
van Dolder, Dennie and Jurgen Vandenbroucke (2024), “Behavioral Risk Profiling,” forthcoming in Journal of Banking and Finance.
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