Employees need help changing their retirement mindset, says Ric Edelman, chairman and CEO of Edelman Financial Services. A combination of factors - including a misunderstanding of exponential growth and its effect on compounding interest - have led workers to short-term planning that can be deadly to 401(k)s and other defined contribution plans.
Edelman, author of titles including "Ordinary People, Extraordinary Wealth" and "Rescue Your Money," says that, despite what we've been taught to believe, working hard can only make you successful in your career, not in your finances.
"You are incapable of saving enough money to meet your needs," Edelman says. "That's the bad news. The good news is you don't have to. ... What we don't teach in our schools, in our universities, is how to make money with the money they've made."
Edelman says he often speaks with plan participants in their 50s who are worried about the growth of their plans. Wait another 10 years, he tells them, and you won't believe what compounded interest can do; exponential growth will save you, you just have to give it long enough.
"What people don't understand is the astonishing element of growing money and how it grows," Edelman says. "They think money grows duplicatively; they think money grows linearly, because we're used to counting one, two, three, four, five, but that's not how money grows. ... When someone asks, 'When can I retire?' I always say the same thing - 30 years after you start saving for it."
Worse are savers who constantly monitor their funds' growth (Edelman advises turning off features that allow constant check-in on nest eggs), celebrating minor successes and lamenting insignificant setbacks.
"When a farmer plants a seed," Edelman says, "he doesn't come back out the next day and dig up the seed to see how it's doing."
Employees must be encouraged to take the long view. Checking investments online during the day, checking monthly statements - these are distractions. If you don't plan to withdraw your investment after a month, why do you care how it does over a month? Over-informing investors leads to the same short-term thinking Edelman says leads participants to buying when the market is high and selling when it's low.
"And this is what we saw throughout 2008 and 2009," he says. "Half a trillion dollars was withdrawn from the stock market in 2009, 2010, 2011. After the market fell and people saw how much they lost - that's when they sold. ... Saving for your retirement is for 10, 20, 30 years from now, and we need to act accordingly.
"In the past 10 years, from 2003 to 2013, the stock market has been open for business 2,517 days. If you were invested those entire 10 years, your average annual return would have been 5% per year. But if you missed the six days out of the past 10 years - six days out of the 2,500 - that were the best-performing days of the decade, what would your return have been? It would have been zero. The entire profit of the S&P 500 over the past 10 years was produced in six days."
If employees missed those six days they'd miss out on a decade of stock profit. Investors need to think of retirement as a lifelong goal, not a quick turnaround, says Edelman.
In addition to understanding monetary growth and adopting long-term thinking, Edelman says participants need to follow that old one-word adage: diversify. "The best approach is to invest everywhere all the time," Edelman says.
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