Craig McKenzie, a cognitive psychologist with the Rady School of Management at the University of California, San Diego, said his experiment with a simple intervention demonstrated the enormous benefits of earning compound interest motivated his research subjects to save.
McKenzie asked the study participants: "If an employee put $400 per month toward retirement -- at 10 percent interest a year -- he or she would have $302,412 in 20 years, how much would the retirement account have in 40 years?"
"Most Americans can't do the math," McKenzie said in a statement said in a video presentation. "And if they can't do the math, then they are unable to comprehend how much easier their lives would be if they took advantage of the enormous benefits of starting to save early for their retirement."
Although McKenzie acknowledged the 10 percent return on investment was unrealistic in the current investment market, he said most people cannot believe they could have $2,336,889 saved up by the time they reach their 60s if they start saving $400 each month while in their 20s.
This "simple, straightforward intervention" gets the point across to research subjects the implications of earning compound interest over many years -- motivating them to save, McKenzie said.
McKenzie presented his findings at Rand Corp.'s Behavioral Finance Forum in Washington.