A new study has found that one difficulty workers saving for retirement have in judging whetherthey’re on track is that they could be under the “illusion ofwealth” or, conversely, under the “illusion of poverty.”

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The study, “The Illusion of Wealth and Its Reversal,”published in the Journal of Marketing Research, found that theformat in which information is presented affects an individual’sperception of wealth (or poverty).

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Currently in the U.S., the paper finds, a third of nonretiredhouseholds have no retirement savings, and half aren’t puttingenough away to support them in retirement at their current rate ofconsumption.

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And while plenty of factors could play into this inadequatelevel of savings, one psychological factor that could be behind it isthat “people at lower wealth levels overestimate the adequacy oftheir retirement savings because of the format in which these arepresented (i.e., as a lump sum), and thus they become less inclinedto save.”

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People can’t accurately translate a lump sum into monthlyincome, the study says, and when presented with a lump-sum numberof accumulated retirement savings (such as $1,000,000)—asretirement plan statements customarily do—they cannot judge whetherthat’s enough to support them or not.

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But they err on the side of believing that it is—the “illusionof wealth”—even though whatever lump-sum number the statement maypresent might be wholly inadequate.

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In addition, they may be so under the wealth illusion that theytake no action to boost savings and even spend profligately inretirement, believing they have more than they actually do.

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In contrast, if they are given a statement that translates thatlump sum into an equivalent monthly income at retirement, theyreact with an “illusion of poverty” and may not believe that it’senough to get by on. They are more likely to increase their savingslevel and once retired may hold back on savings more than they needto, believing that they’re in imminent danger of exhausting theirmoney.

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In fact, the study cites a related one that “presented 17,000employees with projected effects of increasing savings rates,expressed in terms of either total accumulation at retirement ortotal accumulation at retirement in addition to monthly incomeprojections. They found that the addition of projected monthlyincomes increased employees’ saving rates more than those whoreceived only projected total accumulations.”

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The “illusion of wealth” study examined “whether people are moreor less sensitive to changes in wealth presented as lump sums(e.g., $100,000) or equivalent monthly amounts (e.g., $500 permonth for life from age 68).”

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Study respondents “were asked to imagine that for each listedamount of money, they had that amount—and only that amount—of moneyto spend during retirement,” the study says; respondents were alsoasked to assume they had no assets—house, money, anything—thatcould be spent beyond the amount they were presented with.

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Next, they were shown a table with seven monetary amounts andasked to grade each amount on a seven-point scale that ranged from“totally inadequate” to “totally adequate.”

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At the three lowest wealth levels, respondents perceived thelump sums as more adequate for retirement than monthly amounts,while at the three highest wealth levels, they perceived monthlyamounts as more adequate than lump sums.

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Even when the amounts were roughly equivalent—say, $1,000,000compared with $5,000 per month of income, the latter of which isapproximately what an annuity payment would provide on a milliondollars—people perceived the former as “wealth” and the latter as“poverty.”

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The study’s authors suggest that reframing retirement savingstotals in terms of monthly income during retirement—and presentingthat depiction first—would be more helpful in stimulating highersavings rates than just presenting savers with a lump-sum total,which is not only the way most statements provide the informationbut most online tools do as well.

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“[S]aving intentions are more sensitive to wealth expressed asmonthly amounts,” the study finds, “rather than lump sums.”

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