Commitment Devices: Making Retirement Saving Irresistible

Commitment Devices: Making Retirement Saving Irresistible One of the very powerful tools is commitment devices - mechanisms to ensure that people remain committed to a long-term objective, for it creates consequences for those who may drift away from the objective. Automatic enrollment in a company\'s pension plan is the kind of commitment device that could force an employee to start saving part of his salary for retirement purposes, often automatically and with minimal further steps required. How to Use Commitment Devices:- • Employer-Sponsored Plans: Use employer-sponsored retirement plans, such as 401(k)s, if your employer offers a matching contribution. Automatic payroll deductions ensure saving for retirement will be a priority. • Automatic escalation: Many retirement plans provide the option for participants to automatically increase their contribution rate every year, so that the retirement savings grow over time without requiring conscious effort. b. Framing Effects: Reframing Retirement Decisions The way the retirement options or information are presented can greatly influence decision-making. In behavioral finance, this is known as the framing effect. For example, people are more likely to choose to save more when the choice is fra