A no-brainer way to save for retirement

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the ongoing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

You don't need me to tell you how tough it is to save money. The personal savings rate has plunged since the 1980s as Americans spend nearly every dime they earn.

And many of us spend more than that -- also known as getting into debt. Consumer debt in America now totals almost $2.5 trillion, not including mortgages or home-equity loans. That's an average of more than $19,800 in credit card debt, car loans, education loans and other debt for every household in the country.

And need I mention the woeful state of our retirement funds? According to the Employee Benefits Research Institute, 50% of workers saving for retirement have less than $25,000 -- and 70% of those who aren't saving for retirement have less than $10,000 in savings.

Luckily, there's a simple solution that makes it easier, if not completely painless, to save money for retirement, buying a house or any other goal you have in mind.

The trouble with saving

When behavioral economists study why people have such a hard time saving money, the biggest factor isn't spending per se. (Phew.) It's inertia, what they call "status quo bias." That means you're more likely to keep doing whatever you're doing rather than change it.

For example: Wharton economist Birgitte Madrian co-authored a study that found that two-thirds of 401(k) participants knew their savings rate was too low. But when some workers said they would save more -- 86% of them never did. Amazing, right?

Not really. A growing body of research shows that this is just the way we humans are. As you may know from reading this column.

Making inertia work for you

So two economists found a way to harness the vast power of human inertia -- and it's called Save More Tomorrow.

Remember the old bumper sticker: "Why do it today if you can put it off 'til tomorrow?" Economists Richard Thaler at the University of Chicago and Shlomo Benartzi at UCLA patterned their retirement savings plan after that thought.

But as you'll see, this strategy isn't limited to retirement.

Continued: How it works

 1 | 2 | next >