Bigger Nest Egg? Thank Richard Thaler

Each of us has a different ability to live with uncertainty (risk) and so our investments will be different:

Remember each of us has different goals and needs and our asset allocation should fit us and our family. For example, although still within the working part of my life, I must take significant withdrawals from my IRA each year (Required Minimum Distributions, RMDs) so a significant part of my investments within my traditional IRA are invested in bonds.

If you have questions about your asset allocation or your retirement plan investments, I’d be pleased to assist.

By Jan Hall and Jon Stokes, “Changing Gear, Creating the Life You Want After a Full-on Career,” contains a very detailed, systematic approach to planning ones retirement. The book is directed to individuals who have climbed the organizational ladder, type A personalities, who derive a lot of satisfaction from their jobs.

They posit that one’s career choice may be made for unconscious and well as conscious reasons, that family dynamics may play a larger part than one is able to understand clearly.

The book recommends thinking in an intentional way about what one will do with one’s time in retirement prior to the retirement date. It has a large number of examples of individual situations, the problems and opportunities which arise and how each individual coped with the changes involved.

With 329 pages plus index, it is not a quick read.

This article appeared in Investment News, October,16. 2017 edition:

“If you have a 401(k) plan at work, there’s a good chance that you’re saving more for retirement because of Richard Thaler.

The Nobel Prize for economics tries to recognize important research with far-ranging consequences—but Mr. Thaler, who was awarded the prize last Monday, may be its first winner to have had an almost immediate effect on millions of people’s paychecks.

Over the last few decades, as more and more American employers killed off their pensions, workers were offered 401(k)s or similar retirement plans with defined contributions rather than defined benefits.

These voluntary accounts should have worked, in theory. Standard economic theory assumes people act rationally: Workers left to their own devices, should save and invest properly to meet their long-term goals.

But Mr. Thaler and other adherents to behavioral economics pointed out that workers saving for retirement can be their own worst enemies. Without help, Mr. Thaler argued, they’ll never retire. ‘Probably [behavioral economics’] biggest impact is changing the way retirement plans are run,’ Mr. Thaler said in a speech at the CFA Institute’s annual conference…

For years, Mr. Thaler championed the idea that employees could be ‘nudged’ into joining retirement plans, a concept known as automatic enrollment. Rather than waiting for workers to fill out 401(k) paperwork, employers should automatically sign them up for the plans. If employees aren’t interested, they can opt out.

A survey last year by the Plan Sponsor Council of America showed 58% of plans were automatically signing up workers, up from just 8.1% in 2000.

Automatic Escalation:

Mr. Thaler didn’t come up with the idea of automatic enrollment, even if he helped popularize it in the 2008 best seller he co-authored with Cass Sunstein, ‘Nudge, Improving Decisions About Health, Wealth and Happiness’ (Penguin Books). Mr. Thaler did, however, develop the notion of automatic escalation, also called ‘save more tomorrow,’ along with Shlomo Benartzi, a behavioral economist at the University of California at Los Angeles.

The goal of auto-escalation is to boost how much workers are saving. Setting aside 15% of your salary—an appropriate level for many middle- and upper-income workers—can feel impossible. Auto-escalation addresses this by nudging workers to agree to future increases in their savings rates, usually one percentage point each year. A majority of employers now offer some kind of auto-escalation feature, according to the PSCA, though often workers need to proactively sign up for the option.

Automatic escalation can have a big impact on savings rates, according to a recent analysis by David Blanchett, head of retirement research at Morningstar Investment Management.

According to research by Jack VanDerhei of the Employee Benefit Research Institute, the combination of auto-enrollment and auto-escalation can boost a worker’s chances of retiring with enough income.

In Mr. Thaler’s world of defaults and nudges, much depends on getting the details right. The wrong kind of nudges can be destructive. Many companies encourage workers to invest much of their retirement in company stock, something Mr. Thaler has argued is too risky.

He also says many companies are encouraging workers to save too little.”