- The retirement plan industry uses the term inertia to describe how people’s natural procrastination can be used to help them save for the future.
- If you continue that lack of action, it can hurt you in the long run. Here’s how to start paying attention and making some small changes that will pay off.
We all know what inertia means.
That's when an object at rest tends to stay at rest. If that object is you, it means you keep doing what you're doing, whether it's watching TV or leaving your retirement plan untouched. After all, why bother?
They know all about inertia in the retirement plan industry. Only they try to use it to help you. Their thinking goes like this: People who use the company savings plan don't want to be bothered and they don't want to make too many decisions.
So they make the choice for you. A lot of companies use something called auto-enrollment to put you in the 401(k) plan. Voila! You are saving for retirement and you didn't have to lift a finger.
Some plans even have an automatic increase feature. That means you'll be contributing a little more each year. Again, no work at all for you.
But just like sitting around and watching TV, which we all know is not healthy in the long run, taking a sit-back-and-do-nothing approach to your retirement plan can also backfire.
The best advice from two pros at Voya VOYA Financial, which administers 401(k) plans, is pay attention to your plan at least once a year.
According to research from Voya, you have to do three simple things to win at 401(k) saving. First, be in the plan.
You're unlikely to reach a successful retirement someday if you don't get started, and the sooner, the better, says Rick Mason, head of behavioral finance, at Voya.
If your company puts you in automatically, that's great. Problem solved, at least for now.
Second, make sure you are saving enough to get the match, if your company offers one. Some companies put you in the plan automatically, but at a level that's below what you need to get the match.
"Some plans default at 3 percent, and the match is at 5 percent," Mason said.
Whatever the difference, try to save at that higher amount so you don't walk away from free money .
Saving to get the match is a goal, but most recommend a higher amount – 10 percent to 15 percent. For employees just starting out, that can be tricky, Mason says. Increasing a little bit each year helps you get there gradually.
Research shows that people who are more hands-on with their 401(k)s save more and save at higher percentages.
Here's what happened. Voya tracked people who logged onto their accounts and paid attention to what they did. People who saved the most were the ones who visited and took some kind of action.
Maybe they read an educational piece on the site about how to choose investments. Or they played around with a slider tool to see what would happen if they increased their savings amount, and the effect that would have on their retirement income. They might have looked at different scenarios to calculate how much money they would have if they retired at age 65 versus age 67.
The chart shows the difference in savings for people who spent time using different aspects of the website – almost twice as much as people who never logged on.
Third, check your plan from time to time. You generally get quarterly statements in the mail, but you can go on the website any time you like. Once a year, twice a year, set a date like your birthday or mid-year and see how things look. You might want to save more, or change your investment mix.
Your goal is to be able to generate at least 70 percent of your income when you're retired. When you are younger and earn less, Social Security goes a long way to provide that income replacement.
"As your income goes up, Social Security becomes a lower amount of that 70 percent targeted goal," Mason said.
A word about jargon
One thing that can stand between you and your retirement plan is jargon. The retirement plan industry works tirelessly to improve plans and the features you use, yet it sometimes forgets that savers (whom they call participants) don't know all the lingo.
It can be hard to make sense of your retirement plan when the industry uses what seems like a foreign language. Here's how to translate "plan speak" to plain English. Here's a sample:
- Many plan sponsors now offer the ability to "auto-escalate." Translation: You'll automatically save a bit more each year without having to change anything.
- The research and analysis supports the digital interface we've been evolving. Translation: We started with this program, and it looks like it's working for people.
- The voluntary automatic savings increase tool is a feature of the website that allows participants to elect their own automatic increase schedule. Translation: Employees can choose a schedule to automatically increase how much they save.
If you come across some language you can't make sense of, ask your HR department to help you out. Sometimes the plan provider can assist, as well. Most have a toll-free number and staffers who can put things into plain language.
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