Hypothetical Trade-Offs and What They Tell Us About Ourselves

According to a 2021 PLANSPONSOR Participant Survey, the average retirement saver may not be that savvy. That is of course not what the survey said, but it did reflect some inconvenient truths about saving for retirement. Sometimes our desire for the known forces us to make potentially poor decisions. One either/or question was whether you would rather have a 3% guaranteed annual return or be promised a market-based return that might greatly exceed 3% but could also lose money.

60% of respondents took the sure bet. That 3% sounds great in a down market. Unfortunately that same 3% is just going to keep track with inflation over time. For a retirement investor with a long time horizon until retirement, they probably can't afford to take the 3% guarantee. It is similar to the Stanford Marshmallow experiment. In 1972 psychologist Walter Mischel did a study on delayed gratification. A child was offered a choice between one small but immediate reward or two rewards if they waited for a period of time.

Unfortunately in adulthood, our ability to delay gratification is just like that child who wants the marshmallow now. If you can save for a long time, invest according to your risk tolerance and take on higher risk during your early accumulation years, the potential reward is significant. It is also key to your long term ability to afford retirement.