Saving in Pennies, Not Percents

When you’ve got bills to pay, putting aside hundreds of dollars for savings can be intimidating – but who cares about pennies?

Half of all adults approaching retirement age don’t actually have any retirement savings and American households have an average of $93,000 in savings. That’s not even close to being enough to get through just five years of retirement.

How saving is framed makes a big difference to most workers. New research from Voya, an investment and insurance company, found that people are willing to save more when they think in terms of pennies-per-dollar earned instead of a percent of their income.

Seven pennies for every $100 earned sounds more appealing than seven percent of your paycheck.

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Voya’s study says that a lot of people aren’t able to understand or analyze percentages, so framing them in a way that’s more relatable “nudges” workers into making better financial decisions. When using the penny framing method, people are more likely to sign up for – and contribute more to – work-provided saving plans. This is even more true for low-income workers.

People who were presented saving options using percentages had an average savings rate of 6.9 percent of their income. Those who were presented with the penny model had an average rate of 8 percent. This is a big jump and brings the average worker closer to high-income earners who save an average of 8.5 percent of their earnings.

“It reduces longstanding societal gaps in savings behavior, making it easier for lower-income employees to better prepare for retirement,” said Shlomo Benartzi, Voya’s senior academic adviser. “Over time, helping people save just a few pennies more can add up to thousands of dollars of retirement security.”

This method of thinking isn’t entirely new. George Fraser, a retirement benefits specialist, is credited for coining (pun intended) the “Pennies on the Dollar” model in 2017.

“If you talk about saving a percentage of salary, it can sound enormous to individuals,” Fraser told PlanSponsor. “Reframing it to saving pennies on the dollar has resulted in almost 100% participation for our plan sponsor clients.”

In 2020, academic researchers studied how workers used a financial app and, like Voya and Fraser, found that breaking saving up into smaller portions is more appealing – even if the total amount at the end of the month is the same.

For example, people are more likely to commit to saving $5 a day than they are $150 a month.

“We don’t do well with percentile and numeracy but everybody understands what a penny is,” Fraser said in Plan Advisor.

While over 70 percent of workers had access to retirement benefits, only 56 percent are actually enrolled in a workplace retirement plan. Getting Americans to invest in themselves hasn’t been an easy task. But if employers adopt the pennies-per-dollar model when advertising their benefits, people might actually be more open to.

“The beauty of this is it works so well with low wage-based companies where folks thought that there was no way they could get people to save,” Fraser said. “They just didn’t feel like they have the abilities to do it—and this works every single time.”