“Behavioral Judo” – Don’t Stop at the Minimum Auto-enrollment
November 15, 2010I never practiced Judo but I’ve been on the receiving end where I said, “What just happened here? Why am I flat on my back on the mat?” That is what happens when you are the mother of three boys! Judo practitioners use the opponent’s motion to keep them going in the direction they are going and in the case, take them down to win a match.
[YouTube video: Judo Match ]
Sometimes continuing in the same direction is not a bad thing, of course, if the direction is somewhere you want to go. It is not unlike a “good” habit. A good habit most of us have is to wake up in the morning and brush our teeth. We do it automatically without thinking.
In terms of finances, many people have already been nudged in the right direction by a simple auto-enrollment in the 401(k) when they started with their companies. Once this gets started, it is kind of a behavioral judo since many employers only have the contribution rate set at about 2%, employees don’t even notice it and every month they make their needed retirement contribution.
Here’s where you may want to use the same philosophy and continue to move in the direction you are going. Stop and think for a minute. Do you think that a 2% 401(k) investment rate is going to be enough for you to retire someday? Probably not. In terms of your financial goals at retirement, the gentle nudge you are getting from your employer should only be the start. There are two reasons you might want to examine your contribution rate.
If you only stick with the minimum, you may be missing out. First of all many companies still have matching contributions, many will match 25 – 50% of contributions up to 6% of salary saved. So if you are only saving 2%, you are missing out on free money. Here is an example:
Using a salary of $40,000 and earnings in account of 7%
6% savings $2400 per year
2% savings $800 per year
Company match at 25 cents per dollar up to 6% = $600
Company match at 25 cents per dollar up at 2% = $200
Loss by not saving up to full match: $400 per year
What else are you losing by letting yourself stick with the auto-enrollment? You are also losing the value of your own retirement savings contributions. Let’s compare calculations if you were able to save 10% with a company match versus sticking forever to the 2% savings.
Same salary and rate assumptions as above
The Saver at 2% of income with company match at 25 cents per dollar:
In 30 years they would have $121,997
The Saver at 10% of income with company match at 25 cents per dollar:
In 30 years they would have $467,656
Who would you rather be? You might not practice the martial art of Judo but seriously, you can still use the concept yourself. Ask yourself what direction are you going and then nudge yourself by increasing your contributions from time to time in increments that work for you. You can painlessly make savings one of those good habits.