Employees at a manufacturing company agreed to save part of raises they had not received yet. When their pay increased, so did their retirement contributions. They could still opt out. By committing before the extra income became ordinary spending, they avoided repeatedly deciding what to sacrifice.
The program, first implemented in nineteen ninety-eight, was called Save More Tomorrow. Richard Thaler and Shlomo Benartzi designed it around the tendency to leave existing arrangements alone. Here, inertia kept money flowing into savings. More than three-quarters of those offered the program agreed to participate, and over eighty percent of participants stayed through subsequent raises. Automatic enrollment similarly makes participation the default, while employees keep the option to leave.
Burton Malkiel uses the program to explain how fewer repeated decisions can improve saving. His wider argument connects that habit with investing. Automate useful work, reduce costly predictions, and give attention to the decisions that change whether the money can support you.
Choose the decisions worth repeating
A rising investment can make its owner feel unusually skilled. Selective memory helps. The winning predictions remain vivid, while mistakes become bad luck. Confidence can encourage more trading, even though recent success gives limited evidence of an ability to keep winning.
Losses create another temptation. Selling below the purchase price can feel like admitting failure, so investors keep a disappointing holding while selling winners to record a success. The purchase price becomes an emotional reference point. Yet an unsold loss has already reduced wealth. Keeping the investment makes sense only if its prospects at today's price justify ownership. Patience leaves room to sell when the original case fails.
Switching between fashionable funds can also leave investors behind the funds themselves. They buy after a rise and leave after a decline. Trading adds expenses, while selling gains in a taxable account can bring taxes forward. Money spent on fees or tax no longer compounds in the portfolio. A good investment's published return is not necessarily the return its owner keeps.
Malkiel's preferred foundation is broad, inexpensive index funds, which hold a collection of securities instead of requiring repeated choices of winners. They still fall when their markets fall. Regular payroll contributions remove the need to keep predicting the perfect moment to buy. A fixed contribution buys more shares at lower prices and fewer at higher ones.
Regular buying cannot prevent losses, and continuing requires money available to invest. Nor does it prove that someone with a lump sum should hold it back. In a rising market, cash awaiting future installments misses gains. Saving from successive paychecks and delaying money already available are different decisions.
The portfolio still needs maintenance. Suppose the intended mix is sixty percent stocks and forty percent bonds. After stocks rise, their share becomes seventy percent. The household now carries more stock-market risk than it chose. Rebalancing restores the intended proportions. It controls exposure; it does not promise a higher return.
New contributions and dividends can go toward the underweight holdings, reducing the need to sell. A low-cost target-date fund can handle rebalancing and gradually adopt a more conservative mix as retirement approaches. Advice can help too, provided the service justifies its total cost. Malkiel favors fee-only advice over commissions tied to selling products. Delegating transactions still leaves the owner responsible for understanding the arrangement.
When the money starts flowing out
Retirement changes the problem. The same portfolio must now supply living expenses, perhaps for much longer than average life expectancy suggests. A finite balance has to support an uncertain number of years.
Poor returns early in retirement are especially damaging. Spending continues while investments are down, so more holdings must be sold to meet the bills. Those holdings are gone when prices recover. An identical decline arriving later can leave a very different outcome. The order of returns matters alongside their average, which is why spending the entire hoped-for return leaves too little protection.
In the book's twenty-nineteen edition, Malkiel illustrates an initial annual withdrawal of three and a half to four percent of retirement savings. His assumptions leave room for inflation and disappointing markets. They are a starting framework, with no guarantee the savings will last.
The percentage establishes the first year's dollar amount. He then proposes gradually increasing that amount for inflation. Taking four percent of each year's changing balance would instead make spending rise and fall with the market. A smooth spending plan still needs reassessment when health, other income, resources or circumstances change.
When investments must be sold, taking money from holdings above their target weight can fund spending and rebalance at once. Taxes and required account withdrawals also affect where the money comes from. Reducing trading does not remove these decisions.
Another option is to exchange part of the savings for an insurer's promise of lifetime payments. An annuity transfers longevity risk under its contract, but gives up access to that capital and generally reduces what can be left to heirs. Payments depend on the insurer honoring its promise. Fixed payments lose purchasing power as prices rise; inflation or survivor protection usually reduces the initial income. Fees and tax consequences matter too.
Keeping some investments outside the annuity preserves flexibility. The choice reflects how much dependable income and spending freedom the household needs. A simpler portfolio leaves attention available for these questions, and for changes in work, health and spending that actually require a different plan.
Three things to keep
Automate contributions and rebalance to maintain the risk you intended to take.
Avoidable trades add costs and can accelerate taxes; useful sales still belong in the plan.
Retirement spending must allow for early losses, inflation, and a longer life.