Retirement Outcomes: This One Simple Concept can Help Them Improve. Chronic worriers hear it all the time: focus on what you can control, let go of what you can’t. There’s a lesson there for retirement savers, I think.
We spend a lot of time in this industry emphasizing the investment aspect of saving for retirement. We tell retirement plan participants: choose the “right” asset allocation, make sure you’re optimizing your investment returns, and on and on. Sure, they can control their investment mix by getting the balance right between stocks and bonds, depending on their time horizon to retirement and tolerance for risk. Maybe. That is if they can figure it out. And most retirement plan participants can’t.
Investment returns are kind of a crapshoot. After all, no one can control the markets’ ups and downs, and none of us has a built-in crystal ball that can tell us which asset class will provide the most rewarding returns and when. What’s more, unless you’re an experienced investor — and most employees aren’t — investing is just plain hard. There are so many nuances of the different funds and asset classes available in employer-sponsored retirement plans. It’s enough to make workers’ heads spin. And target-date funds attempt to vastly reduce that complexity, but even at that, retirement plan participants manage to misuse them — either investing in the wrong fund for their age and anticipated retirement date, or not putting all of their savings into a single fund, which is how they’re designed to be used. When you get right down to it, investing for retirement can be one big, hot mess.
So what’s the one aspect of retirement planning your participants can control? How much money they save. It’s so easy, isn’t it? But when we’re directing their focus to all of the other aspects of saving for retirement — big, hard-to-understand (for the layperson) concepts like asset allocation, compounding, asset classes, investment returns, time horizon, risk tolerance, target date, etc. — it’s easy to overlook something as “trivial” as figuring out the amount they actually need to save, starting today, wherever they are, to achieve their goals. Saving for retirement is overwhelming. It’s why we built all of these automatic “stop gaps” into many workplace plans to help overcome employees’ inertia. At the end of the day, as easy as saving for retirement appears, it’s also just as easy not to do. And without automatic features, we know that most workers would simply choose to avoid saving for retirement altogether, simple or not.
So that’s it. That’s the big lesson, the magic wisdom of today’s post. To help improve retirement outcomes, participants simply need to save more. And start as early as possible. It’s not rocket science. It’s actually a no-brainer. But again, the simplest of ideas can often become lost in complexity. That said, no matter what their age or stage of life, today’s workers can always, in theory anyway, set aside more for retirement. Between upping their savings and the magic of compounding, that one simple step is more powerful than any investment strategy. And it’s totally within their control.
Special thanks to Ben Carlson, CFA for his post on making up for a retirement savings shortfall, which appeared earlier this week on his blog, A Wealth of Common Sense, and inspired me to write this piece.
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