Missourians aren’t contributing very much to their retirement funds, according to one University of Missouri researcher. The study by University of Missouri associate professor of personal finance planning, Rui Yao, shows that more than 90 percent of Americans are contributing only a minimal amount of their salaries to retirement funds.
She looked at how much people invested in retirement funds compared to the limits set each year by the Internal Revenue Service (IRS) of the amount of income a person can set aside for retirement with tax benefits. In 2004, 43 percent of adults 21-70 contributed 20 percent or less of the IRS maximum amount to their retirement funds. In 2007 that was true of more than half of those adults and in 2010 it grew to more than 90 percent. Also in 2010 only 3 percent of working Americans contributed the maximum amount allowed by the IRS.
Yao says the behavior runs contrary to common economic theory.
“We see the pattern is that when economic performance is not good, people reduce or refrain from their defined contribution plan deferral.”
Yao says one possible explanation is that people are responding to the risk of the market rather than the returns.
“If the returns go up and down very much, people freak out. They get concerned and scared. They stop participating in this thing that they’re not seeing a good future of.”
She says that runs contrary to common sense economic theory, to buy when the market is low and sell when it is high.
“If security prices are lower it’s a good opportunity for people to get in, but people are not practicing what they know is a golden rule.”
She adds, “If Americans truly want to maximize their retirement funds it is critical that they contribute more during a weak economy while they can ease up a little bit when the markets are higher.”
Yao says employers and financial advisors must recognize the pattern her study revealed, and educate their clients and employees on the importance of contributing higher amounts during poor economic times.
“People responded to market performance when they shouldn’t be, so financial planners and advisors and employers should realize that people make decisions not because they are completely informed, not because they are completely rational but because they are looking at the future from a bias, and this bias is based on their … immediate past experience.”
Yao’s study was published in the Family and Consumer Sciences Research Journal. She was also recognized by AARP with its Public Policy Institute’s Financial Services and the Older Consumer Award.