Employees need help changing their retirement mindset, attendees to the 2013 Society for Human Resource Management annual conference were told on Tuesday. Ric Edelman, chairman and CEO of Edelman Financial Services, told his Chicago audience that 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, who handed out copies of his book “Rescue Your Money, said 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 said. “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 said he always 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 your compounded interest can do. Worse are savers who constantly monitor their funds’ growth (Edelman advised 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 said, “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. Edelman showed a graphic charting the positive and negative months of the past 86 years of the S&P 500; the image was jagged and static.
“Looks like an EKG print out, doesn’t it?” Edelman asked. Change it to years and things smooth out, and the negative patches start to fade. More so again with five-year intervals, and, graph it by decade, the negative lines disappear – everyone makes money.
Read tomorrow’s inBrief for more from SHRM 2013 and pick up September’s EBN for more of Edelman’s advice on faulty retirement plan thinking – and how to correct it.
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