How information overload can hurt your retirement
There is no shortage of retirement advice and products today. In fact, according to the Deloitte Center for Financial Services, companies spent $1.14 billion advertising retirement products in 2011.
Beyond all that advertising, you only have to type in the words "retirement advice" into your favorite search engine to find page after page of information on retirement services and strategies.
But according to some finance professionals, all that incoming information isn't necessarily a good thing.
"Both the volume and speed (of information) seems to be increasing," says Russ Thornton, a financial adviser specializing in services for women and a vice president at Wealthcare Capital Management in Atlanta. "I think a lot of people stick their head in the sand as a result."
Thornton isn't alone in questioning whether all this information is really helping consumers as they plan for retirement. Several studies indicate that access to retirement information doesn't necessarily translate into smarter decision-making or greater understanding of financial products.
Information doesn't equal understanding
For example, Deloitte found that despite the more than $1 billion spent on product advertising, the following percentage of survey respondents said they knew nothing about or did not understand how these common retirement investment products work.
Target date mutual funds: 60 percent
Fixed income securities (bonds): 44 percent
Annuities: 38 percent
Mutual funds other than target date funds: 37 percent
Dividend stocks: 34 percent
But the complexity of certain products isn't the only challenge facing consumers here. In some cases, having more investment options may lead workers to simply bow out of the investment process because of the work required to sort through their choices.
In 2009, a study conducted jointly by retirement services firm T. Rowe Price and researchers at Columbia University found too many choices led to lower participation in certain plans. That finding was backed up by a 2011 study from Columbia Business School.
In that second study, researchers discovered allocations to equity funds dropped 3.28 percentage points for every additional 10 funds offered to investors. In addition, for every 10 funds added to a plan, there was a 2.87 percent increase in the chance an individual would opt out of equity funds completely.
Equity funds are often among the most lucrative investments in a retirement portfolio. By declining to put money in these funds, or by putting in less money, workers could find themselves with less cash to use at retirement time.
When announcing its findings, Columbia Business School summed up the report this way.
This research joins a growing body of research in psychology and economics that demonstrates why consumers can be better off with a strictly smaller choice set.
Cutting the noise around retirement
If you're feeling paralyzed by your choices or confused by financial jargon, Thornton says the best thing may be to block out all the "noise."
"What I tell people, regardless of their age or wealth, is to focus on things they can control," he says when asked how to combat information overload.
For example, stock market prices and interest rate trends tend to impact retirement choices, but they can't be controlled by investors. Instead of fixating on that type of investment news and information, Thornton says workers should pay more attention to the following.
How much they spend/save (cash flow)
The timing of their retirement age
Their level of investment risk (asset allocation)
Once an individual understands, for example, their tolerance for investment risk, they can make smart choices without obsessing over the daily movements of the stock market.
"The most important thing you can do first is to step back and decide what it is you want to accomplish," says Thornton.
Keeping emotions out of retirement planning
For Craig Bartlett, vice president and division consulting manager for U.S. Bancorp., how some people respond to information may be a bigger issue than the information itself.
"What derails people is not the information, but their reaction to it," he says.
Bartlett advises people to take the emotion out of the retirement planning process by using online tools or by relying on a trusted financial adviser to help navigate available options. He points to the U.S. Bank RealSteps Retirement process as an example of the type of free service available to anyone looking for help sorting through an avalanche of retirement advice and information.
With free resources available, from online calculators to in-person consultations, Bartlett says no one should let information overload get in the way of planning for the future.
"The first and most important step is to begin," he says.
Thornton concurs, adding that early starters enjoy the best opportunities in preparing for retirement. "Retirement planning at age 35 looks different than at age 55," he says.
In the end, remember that much of the retirement information available is generalized rather than customized. Instead of obsessing over the perfect retirement savings formula or stressing over stock trends, a better approach may be to evaluate your personal financial resources and goals, look for ways to get advice tailored to your situation and then tune out all the background chatter.
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