The difficulty of saving and investing for the future

Mitchell Barr, Client Associate

retirement plans good old days

It’s always fun and sometimes embarrassing to look back at old pictures of yourself. There’s usually a lot of, “What was I wearing?” and “What was going on with my hair?” Pictures make us nostalgic and remind us of what we were like when we were younger. We can pull old memories out of a dusty file in our brain and reminisce on the good times. We know who we were then and who we are now, but who will we be in the future? We don’t have pictures of our future selves – and time machine developments are slow going – so we have to guess. And we have to guess because we have to plan. Marriage, kids, job changes, and retirement are important life changes that require planning. The problem is we are terrible at imagining who our future selves will be.

Professor Dan Gilbert from Harvard University gave a TED talk a few years ago that described what he called “The End of History Illusion.” The premise is that though we realize we’ve changed significantly from our past selves, we underestimate how much we’ll change in the future. Instead, we assume we’ll be similar to who we are right now. Intuitively, this idea kind of makes sense. We always feel like we’re more mature and wiser than yesterday, sometimes to the extent that we feel there’s not much more to learn. But of course, there always is. The Social Security office says retirement age is 66, urging us to plan for retirement in our sixties. How do we do that if we don’t know who we’ll be when we get there?

Avoiding financial pitfalls

Failing to imagine our future selves can lead to financial foibles. In one of Gilbert’s experiments, he asked people to estimate how much they would pay in 10 years for a concert ticket to see their current favorite band. Another group was asked how much they would pay today to see their favorite band from 10 years ago. The result was that people who were asked to predict how much they would pay to see their current favorite band in the future significantly overpaid relative to what the people would pay to see their favorite band from 10 years ago1. This result is similar to a young couple buying a trendy house in the city, only to realize they want to live in the suburbs in five years.

Another shortcoming that occurs when we can’t imagine our future selves is that we don’t save enough for retirement. Why plan for some stranger we don’t even know? This struggle often leads to overindulgence in the near-term and contributes to the abysmal retirement shortfall experienced by most Americans. On average, people expect to live 16 years in retirement2. If you add that to the full retirement age of 66, that means most people expect to live to 82, which is actually pretty close to average life expectancy3. But what if you live to 102? Even someone nearing retirement will have a hard time envisioning their future self 30-plus years down the road. Not to mention we have no idea how long we are actually going to live.

Thinking ahead

There are ways to try and dodge financial miss-steps associated with our lack of imagination about the future. For example, we can use a commitment device like automatic transfers to retirement and investment accounts. There are even apps that will round up your transactions and invest the difference for you. Another exercise is to expand on future uses for your money. Do you want to retire to a cabana in Costa Rica? Write down details of what that looks like and how you will spend your days. Look at pictures of actual cabanas. Visualization can be a very powerful motivator. You can also take a crack at “interacting” with your future self. One study had participants look into a virtual reality mirror with an aged version of themselves looking back and found that it motivated people to increase their savings2. Try out a simplified version at These strategies can all increase savings, but don’t address the issue of identifying what we’ll want in the future.

In reality, the future is closer to mud than it is to the crystal clear ocean. The best way to combat the future self problem is to build options into well-thought-out plans. Plans have a tendency to blow up, which makes life exhilarating and unpredictable, but sucks for people who try to make financial decisions based on their future. By the time you retire it might not be to Costa Rica, but at least you will have saved enough to go wherever you choose. Be nice to your future self, because you will meet sooner than you think.

  1. Quoidbach, J., Gilbert, D. T., & Wilson, T. D. (2013). The end of history illusion. science, 339(6115), 96-98.
  2. Hershfield, H. E., Goldstein, D. G., Sharpe, W. F., Fox, J., Yeykelis, L., Carstensen, L. L., & Bailenson, J. N. (2011). Increasing saving behavior through age-progressed renderings of the future self. Journal of Marketing Research, 48, S23-S37.

Mitchell Barr

Client Associate

Mitch writes the popular blog, The Money Monkey, where he focuses on common mental mistakes made by investors, how to avoid being your own worst financial enemy, and thinking about investing in new ways.

[mk_fancy_text color=”#444444″ highlight_color=”#ffffff” highlight_opacity=”0.0″ size=”14″ line_height=”21″ font_weight=”inhert” margin_top=”0″ margin_bottom=”14″ font_family=”none” align=”left”]Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Versant Capital Management, Inc.), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Versant Capital Management, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Versant Capital Management, Inc. is neither a law firm nor a certified public accounting firm and no portion of the article content should be construed as legal or accounting advice. If you are a Versant Capital Management, Inc. client, please remember to contact Versant Capital Management, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Versant Capital Management, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.[/mk_fancy_text]