What Newton Has to Do With Retirement
You don’t need to be a physicist to understand Sir Isaac Newton’s first law of motion: “Objects at rest tend to stay at rest unless acted upon.” That principle—called inertia—doesn’t just apply to moving objects. Center for Retirement Research research fellow and Boston College professor of economics Geoffrey T. Sanzenbacher recently outlined how the same principle can be applied to affect retirement savings.
Inertia can be a worst enemy or best friend when planning for retirement. It simply has to do with how you manage your accounts and whether you utilise features of automation like auto-enrolment and target date funds.
When Inertia Works in Your Favor
Inertia is working in your favour when your retirement plan has good behaviours that are encouraged automatically. Some examples:
- Auto-enrolment: Certain employers automatically enrol new employees in 401(k)s. As long as you stay enrolled, you create savings without lifting a finger.
- Automatic contribution raises: Your contributions rise automatically over time, and you’ll save more and more money without even thinking about it.
- Target date funds: Target date funds invest in your future for you, moving from stocks to bonds as you approach retirement.
When defaults like these are set effectively, you can profit by doing nothing or little. Your retirement money builds up due to your own inertia—your tendency to do nothing and let things alone.
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When inertia is a bad thing
Inertia can also be bad if your default setup is not good. For example:
- If you are not signed up automatically for a 401(k), you might never start saving.
- If you’re enrolled but your contribution level is too low and you never change it, you’re losing out.
- If your investments aren’t well chosen or in a target date fund, inertia can result in you having the wrong combination of portfolios.
- The idea is that the “easy option” needs to be the one that positions you for success and not for disaster.
Avoiding investment mistakes
Inertia can also protect you from operating out of fear. Research shows that older investors over-restrict themselves in preparing for retirement, reducing holdings of stocks more than they must. This can hurt long-term returns and leave them vulnerable to sequence-of-returns risks, where withdrawals made in a falling market lock in losses.
In a survey of Americans aged between 48 and 78 with at least $100,000 in investable assets, most invested in too-conservative portfolios compared to recommended glide paths—math equations for gradually shifting money out of stocks into lower-risk assets as retirement nears.
The silver lining: most individuals don’t rebalance their portfolios based on what they are willing to risk. Some stick with target date funds, which keep their portfolios in balance. To this extent, inertia stops them from responding to fear and keeps them invested for the long term.
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Making inertia work for you
Don’t do anything sometimes. Having automatic 401(k) contributions, allowing auto-increases to kick in, and investing in target date funds can get you to your target effortlessly. You’ll also be less likely to panic sell during downturns in the market, which is a big reason that investors lose money.
All things considered, target date funds will be more expensive and perhaps not as closely fitted to your individual circumstances as a personal plan. If you are dealing with an adviser and are able to make informed, intelligent decisions, being more engaged could be better. If emotion or short-term considerations affect your decisions, then inaction—let’s say inertia—can be a good thing.
The takeaway
Before making changes to your retirement savings, ask yourself: are your moves improving your situation, or could doing nothing actually be smarter? When it comes to retirement, sometimes staying the course pays off—just like Newton’s law says.
