Did your 401(k) win a Nobel Prize?

Money Tree

If you are like me, you may glance at the headlines when the Nobel Prizes are announced. You may even start to read an article about what the honoree did to win the prize. But for the most part, you probably don’t see a connection between these technical disciplines and your everyday life.

Last year was different. One of the prizes is for work that may touch your life frequently and may even help you live a secure retirement. It was the Nobel Prize for Economics given to Richard Thaler of the University of Chicago.

From theory to (retirement) reality

Professor Thaler recognized that, despite people’s best intentions, many (perhaps most) won’t save for retirement without a nudge in the right direction. More importantly, he recognized that once nudged into “doing the right thing,” inertia takes over and most people continue to save.

This innovation is the foundation of behavioral finance. It’s why if you’ve started a new job in the last few years, you were probably automatically enrolled into your 401(k), a development that has boosted the average retirement plan participation rate above 75%. It’s also why your 401(k) may have auto-escalation—which is like signing up today to save more tomorrow through annual increases of 1% or 2% in your retirement contributions.

Five steps to make your 401(k) award worthy

You don’t need to be a Nobel-winning economist to see the benefit of these ideas. But there is even more you can do to help bolster your chances of retirement success, especially if you:

  • Worked for companies that didn’t make enrollment automatic;
  • Were enrolled (and stayed) at a lower savings rate; or
  • Frequently changed jobs, so auto-escalation hasn’t really helped you.

Regardless of your situation, consider these five steps to get your retirement savings on track.

1. Start saving as early as you can

If you haven’t started, start now. When it comes to saving for retirement, time is your best friend. If your company has automatically enrolled you, congrats and keep up the good work. If not, take a few minutes a sign up today.

2. Max out your savings rate

If you can’t save the max ($18,500 in 2018), save as much as you can—and certainly at least as much as your company is willing to match.

3. Increase your savings when you can

Commit to investing at least part of this year’s bonus or raise to your retirement savings plan. And let your company sign you up for a future increase to your savings rate (or, sign up for one yourself). Studies show it’s much easier for people to agree to save more in the future than getting them to save more today.

4. Check to see how you’re invested

No one knows what tomorrow’s markets will do, so be sure you’re well diversified and have an appropriate amount of growth-oriented investments for your age. You’re investing your retirement money for decades, so don’t overly focus on short-term fluctuations in the market.

5. Don’t have the time or interest to manage your own investments?

Consider a professionally managed, age-appropriate choice like a target date fund instead.

The key is to make your retirement investing as automatic as possible. That way, you can let time and the power of compounding work to your benefit. After all, it was another Nobel Prize winner, Albert Einstein, who said, “compound interest is the most powerful force in the universe.”

Paul Mele is the Head of Participant Engagement for BlackRock’s U.S. & Canada Defined Contribution (USDC) Group and a regular contributor to The Blog.


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