Retirement Savings — One Small Action Can Make a Huge Impact.Small actions,done consistently over time, lead to big results. We hear this a lot. In mastering a sport or learning a craft. Or in losing weight. Or in furthering our careers. And in saving for retirement. More on that a bit later.
I was inspired to write this post by a book I’m currently reading called “The Slight Edge,” by Jeff Olson. The whole premise of the book is that by taking very small steps and doing them consistently over time, you can engineer very big changes in your life, your career, your health, your wealth, etc. Olson offers some parables at the beginning of the book, and they are central to the wisdom he imparts throughout the rest of its pages. One parable is about a water hyacinth, which by growing leaf by leaf, flower by flower, over time, can cover the entire surface of a body of water. The other is about how a penny, doubled each day, can create remarkable wealth in a very short time.
What both parables have in common is they demonstrate the magic of compounding — how something small and seemingly insignificant, like a penny or a leaf, can grow exponentially over time to create something truly remarkable and quite significant. But here’s the thing: compounding can go in the other direction, too. A series of insignificant negative actions, repeated over time, can lead to a very different, undesirable outcome. Which brings us back to retirement saving.
Here’s a true story: When I was in my 20s, before my career led me to the retirement plan industry, I didn’t “get” the idea of compounding. I certainly didn’t think about using it to my advantage to save for my future. I wanted to spend my hard-earned money NOW. And spend I did. And spent some more. And some more. Until, to my chagrin, I ended up not only not saving for my future, I wound up in credit card debt. Quite a bit of it, as a result of spending my money on useless things that I didn’t really need, and no longer own. I’m thankful to say I’ve long since paid off that debt, but not without a lot of angst and some serious financial sacrifices.
Now, I did set aside some savings in my workplace 401(k) plan at the time, even during all of my spending hijinks and debt repayment. But when I think about how much I could have in savings today if I’d squirreled away all of the money I spent frivolously, I could kick myself. Literally.
I should have known better, and probably did, but spent foolishly anyway. My thought process was “I’ll save later.” and “How much can a dollar spent today really hurt me tomorrow?” As I now know, it can hurt — a lot. Sadly, it turns out a pile of regret isn’t going to get me any closer to my retirement goals. Fortunately, my story has a happy ending: If I keep up with my current savings rate, and if I put retirement off until age 67, and if I achieve a certain anticipated (conservative) rate of return on my investments, I should be able to have a pretty good retirement. Of course, not everyone’s story turns out that way.
In The Slight Edge, Jeff Olson talks about the trajectory of decision-making, and how small, seemingly meaningless decisions made in the moment today make a big impact when compounded over time. However, the decision-making trajectory can go either way — it can either bring you closer to your goal or further away. So for example, if I’d decided to save a dollar (or two, or three, or four) instead of spending it nearly 20 years ago, I’d be that much closer to my retirement goal today. However, I made the “wrong” decision in the moment — or at least the one that was least likely to help me get ahead in my retirement savings — and, in essence, I’m paying for it today. Or at least having to save more in mid-life to ensure I meet my goal.
So what does all of this have to do with your plan and your participants? Simply this: I’d be willing to bet some of them — especially the younger generations — are grappling with the same spend vs. save question that I was in my 20s. Or maybe they have different financial concerns, like paying off student loans or saving for a wedding or a down payment on a home. And they may not recognize the importance of “the slight edge” principle, or how saving a penny today can add up to many dollars tomorrow through compounding. Albert Einstein didn’t call it the “eighth wonder of the world” for nothing.
And like me, they might not realize that they have a huge advantage that I don’t have anymore: time. So if they start saving for retirement today, right now, even if it’s only a few dollars, they might be surprised how robust their nest egg may grow by the time they get to be my age. Of course, that sounds easy to do. It’s just as easy not to do it. It all depends on which direction of the decision trajectory they choose — the one that brings them closer to their retirement savings goal, or the one that moves them further away.
All this to say, that while saving for a comfortable retirement may seem like a monumental, Sisyphean task, it doesn’t have to be. With the advantages of time and compounding on their side, and by starting small and building on their savings over the course of their career, your employees should be able to achieve their retirement goals.
That’s a message I wish I’d received all those years ago, when I was standing in the aisle of my favorite beauty supply store and adding the 10th brown eyeshadow I didn’t need to a basket full of other items I didn’t need, and probably didn’t really want. It’s also a message your employees need to hear, and as a plan sponsor, one you’re in a unique position to deliver. This is for sure an idea that you can, and should, incorporate into your plan communications and education program. You could potentially even build a campaign around “The Slight Edge” to help drive the message home. It could be really powerful.
It’s so simple. It all starts with a penny, and over time, that penny can grow to become something so much more powerful, like the water hyacinth covering the surface of the water. All it takes is one small step in the right direction, then another, then another, until it builds to something truly significant. It’s the same with saving for retirement, and through a series of positive actions and small decisions, you can help your employees accomplish something truly remarkable — achieving their dream retirement. Will you take that first step to help them get there?
