When a person signs up for their 401(k), they’re often hit with an onslaught of options. What percentage do they want deducted? Which of these fifty different funds do you want to put your money into? Or do you want to split your money among different funds?
The documentation that many people get for their retirement plan at work is often so overwhelming with options that people simply put it aside and don’t deal with it.
When a person walks down the bread aisle at their grocery store, they’re often hit with an onslaught of options. What kind of bread do they want? White, wheat, rye, sourdough? What specific brand do you want within those types? What size of bread do you want?
Quite often, people just grab the item they’re familiar with because the analysis of the options can be really time consuming.
In both of these cases (and countless more), people suffer from an overabundance of choices. There are too many variants on offer to actually analyze each of them.
In response to that, people do a lot of things, many of them not so wise. They just grab a choice at random that’s somewhat close to what they might want. They lock down and don’t make any choice at all. They pick the thing that they got last time.
I’m quite guilty of this sometimes. If I’m at the store with my children and I’m just trying to get my shopping list out of the way, I’ll certainly grab something just to keep going.
However, I’ve found that there’s a simple way to eliminate most of the possible choices makes it much easier to find the right item.
Answer Three Questions
Whenever I find myself making either an important choice or a frequent choice in my life, I make some effort to understand what the choice is about (I don’t really sweat the relatively unimportant and infrequent choices).
My goal with that search is simply to find three basic questions about the choice that must have the right answer. What I mean by that is that in order for me to make the choice that’s right for me, each of these three questions must be answered in a certain way.
Let’s look at that bread aisle again. My usual three questions about bread are:
(1) Is it on sale? I immediately eliminate all bread that’s not on sale. For sandwich bread, this is perfectly acceptable to me. (If nothing is on sale, I use the store brand as a “maximum” price for the bread.)
(2) Does it have whole grains in it? I try to avoid white bread for dietary reasons.
(3) Is it soft? If I find a loaf that matches the first two questions, I check and make sure that it’s reasonably soft with a gentle touch. If it’s soft, that’s the loaf that goes into my cart.
These three questions allow me to tear through the entire bread aisle and find a loaf that works for my needs without skipping a beat.
Now, what about that retirement planning choice? Here are three questions I might ask in that situation.
(1) How much of my paycheck can I afford to set aside? This requires you to have a bit of a grip on your budget, but you should be able to figure out if you can survive with a paycheck that’s 10% smaller than before.
(2) How far am I from retirement? Most of the investment options will tell you whether they’re recommended for people far from retirement or near to retirement. Some funds, like target retirement funds, whittle it down to an approximate year.
(3) How much risk can I stomach? If you can’t stomach much risk, choose low risk investments. You won’t earn as much long term, but you won’t have to watch painful swoons in the market like 2008. Could you stand losing 40% of your retirement in a year if you knew that most years would see a 10% gain in your retirement? Could you live with watching your $500,000 retirement nest egg turn into $300,000 in a year? If you can’t stand that much risk, choose low risk investments. If you can, choose some higher risk investments.
Those three questions will whittle down the vast majority of choices that are thrown at you when signing up for a retirement plan.
I try to use the three questions for every major or frequent decision I have to make. If I’m making a big decision or I’m making a very similar decision over and over, I need to have enough knowledge about the decision to know why I’m making it. If I can turn it into three easy-to-answer questions, then that decision becomes a lot easier.