Most people know that they need to save and invest a portion of their income for retirement. But all too often, people either don’t save enough, or not at all. Even people who do save often find the huge array of investment options intimidating enough just to put their money in low-yield savings accounts (or even under the proverbial mattress.) While simple logic might tell us that saving and investing for retirement is the right and necessary thing to do, human nature often leads people to do the exact opposite.

It all comes down to simple psychology. What does psychology have to do with personal finance, you might ask? Quite a lot, in fact.

“The historical concern of psychology in economic models has been to explain individual behavior,” says Teresa Neal, M.A., Ed.D., ABD and a member of University of Phoenix’s online faculty. “[Psychological] researchers do agree that one’s knowledge of the financial planning process strongly influences the quality of one’s savings decisions.”

“A lot of behavioral research on how to get people to save has been done,” says MP Dunleavey, a personal-finance expert and contributing editor to Money magazine.

Generally researchers have found that the intention to save and invest is there, but people’s actual real-world behavior is quite different.”

“In economics, this concept is called hyperbolic discounting,” Dunleavey explains. "Basically that means the understanding that it’s beneficial to give up a certain amount of your present income for a future benefit of unknown quantity. It’s simple in theory, not so much in practice.”

According to Teresa Neal, a number of factors can also play into an individual’s savings rates, among them socioeconomic status, income level, financial knowledge, even their sex. “There is certainly a socialization process involved in savings, and one’s attitudes towards it,” she says. “Those that are more confident in their knowledge are more likely to take steps to prepare [for retirement]. There are gender differences as well. Men in general are more concerned with financial and practical matters (i.e., getting things done), while women are more concerned with cultivating friendships.”

Neal points out that the current recession is making a big impact on individuals’ retirement-planning decisions. “Currently, our economic condition is affecting traditional models of saving,” she says.

In other words, the Great Recession and its massive stock losses—along with widespread unemployment—are negatively impacting savings rates. Even those workers fortunate enough to have stable jobs and spare money to save are seeking out “safe” investment options, which might seem like a good idea in the short term, but can cost you a lot of money in the long run.

The “10-year rule”—a widely accepted financial concept that illustrates how simple year-over-year compounding can result in a person who spends her 20s saving $100 a month, then stopping, having more money at retirement age than someone who started later (say, in their 30s or 40s) yet never stopped saving—shows just how much potential money you can lose by putting off retirement savings until you’re older. (See Figure 1).

Figure 1

MP Dunleavey explains how the “10-year rule” runs hard up against peoples’ usual investment psychology. “People have a natural tendency towards inertia,” she says. “Because of that, it’s important to remove barriers that tend to keep people from saving.” One key way that is happening now is the switch to an “opt out” platform for enrollment in corporate retirement plans. Under the Federal Pension Protection Act of 2006, any companies offering 401(k) or 403(b) plans now enroll new employees automatically at a default savings rate, unless the new employee “opts out” beforehand. (Under the old system, most employees had to “opt in” to their companies’ retirement plans—and many didn’t.)

“This change has been hugely successful,” says Dunleavey. Still, she cautions that it’s important for investors of all ages to educate themselves about their options—which doesn’t have to be difficult or intimidating. For example, she recommends target-date mutual funds, widely available from companies like Vanguard and Fidelity, which feature automatic periodic asset reallocations tied to a specific future expected retirement year. “You don’t have to be George Soros or Warren Buffett to plan for a secure and comfortable retirement,” she says. Dunleavey also recommends getting a “savings buddy” for social support of savings behavior, a method especially helpful for women and the self-employed.

Despite many peoples’ natural psychological tendencies not to save, however, Teresa Neal advises that it’s never too late to start changing your financial behavior. “Learn. Enhance your financial knowledge,” she says. “If one has developed savings habits and has learned (from parents, peers, or formal education) how to spend and save wisely, those behavior patterns are more likely to be enduring.”