Start Small: Even Small Amounts Can Make a Big Difference in Retirement Readiness

We usually only hear about overnight success stories. The people who had a glimmer of a new idea, something new, something radical, something “disruptive.” And while most entrepreneurs believe there is no overnight success, only overnight recognition of decades of work, the reason we hear about instant achievement is, well, it’s interesting. A story of consistent, small efforts accumulated over time just doesn’t have much story to it. There isn’t much to tell.

Most people know the adage about the tortoise and the hare because they hear it as children. The plot line lasts about as long as a five year old’s attention span: roughly 2 minutes. Unfortunately for employers who want to encourage the consistent small efforts, the story lines aren’t as easy. In addition to running counter to the news cycle’s steady beat of overnight successes, plan sponsors and employers might run up against the other children’s story of the ant and the grasshopper. That would be the one where the ant saves all summer for the winter, while the grasshopper sings. Winter comes, the grasshopper is starving and the ant turns him away. Not a great ending and not one to inspire savings.

So how does a plan sponsor beat these stories? By using the same behavior that they want an employee to engage in: start small. Using simple examples, either published through the company newsletter or on flyers in gathering spaces, a plan sponsor can make the “small consistent effort works” story become more familiar.

The key to why even small amounts count, and can have a big impact on retirement readiness, comes down to compound interest. That concept seems complicated in concept. It’s best understood through examples. Explaining to employees that compound interest puts their money to work for them might get their attention, but to keep it, examples have to be relevant.  In other words, show the math on how compounding interest turns a small investment into something helpfulover a relevant time period.

Say an employee can only put aside $200 per month towards retirement, in two years, that $200 each month becomes a $5000 investment. Even if the employee stopped there, compounding the interest from year to year can transform the $5,000 investment into a $17,000 asset in 20 years, for a return of more than 50%.

If you want to show the math even further, try taking the money out of it and replacing it with something simple, like baby animals. Imagine you loan a farmer 100 ducks. Of those you give, the flock has five new babies. Now the flock you loaned is 105 ducks. Imagine the same thing happens each year, only instead of growing by 5 ducks each year, your flock grows by the same percentage of ducks. So in year two, the flock grows by 7 ducks instead of just 5 for a total of 112 ducks. Same thing in year three, this time moving to 10 ducks, for a total of 122 ducks. That’s a lot of ducks. And the visual of ducks growing and multiplying may be less stressful (and therefore more memorable) than dollars.

Another, less stressful way to show compounding interest may be to use your company’s charity or social responsibly plan. Instead of donating an amount to the charity you choose at the end of the year, try donating an amount that compounds each month, and including that information in the company newsletter or flyer. By following along, employees can see how compound interest can have a big impact, even on a small amount of money. And by taking it out of the retirement context, employees may again feel slightly less stressed about the topic and more ready to receive the information about compounding interest.