Don't Plan Too Far Ahead for Retirement

Many financial advisers tell clients to make long-term savings estimates for retirement. In theory, this encourages workers to save and invest on a consistent basis. But a new series of studies found that you should focus on saving for next month instead of the distant future.

Working adults asked to estimate how much they would bank in a specific month in the future said $946 but ended up saving only $123, according to research by Paul Dholakia, an associate professor at Rice University's Jones Graduate School of Management, and Leona Tam, an assistant professor of marketing at Old Dominion University. Saving over a shorter time frame produced much better results. Workers asked to estimate how much they would tuck away next month said $287 but actually saved $440.

"Our study shows that Americans are better at saving money when they are thinking about it month to month on an ongoing basis rather than a long-term goal," says Dholakia. Those who estimated their savings more than a month in the future were twice as likely to save less than their goal, compared with those who planned a month at a time.

The researchers concluded that planning too far in advance doesn't help workers meet their retirement goals unless they think about it in terms of transferring some of their income into savings every month. "This type of time frame helps people see steady progress along the way while not feeling too much pressure," says Tam. "This is similar to some of the dieting regimens: not too close so you don't see progress, but not too far away either, so you don't get discouraged."