24 Apr Don’t Eat the Marshmallow

Originally posted by Troy Hammond on April 14, 2015 on www.linkedin.com.

Having more self-control than a preschooler can lead to more rewards.

Fifty years ago, psychologists at Stanford University conducted an experiment on preschoolers. During this test, researchers placed youngsters in individual rooms and asked each child to sit down in front of a tray containing one marshmallow. The child was given a choice: He or she could eat this marshmallow immediately or wait a little while for the researchers to place a second marshmallow on the tray—an opportunity to enjoy two treats instead of just one.

What did the kids do, what would you do, and what does the ability to delay gratification mean for future retirement success?

While encouraging kids to eat more candy wasn’t the goal of this multi-year study, it eventually led to a powerful conclusion: Children who “passed” the marshmallow test had greater competence and success later on as adults.1 Kids who successfully waited for the second marshmallow showed self-restraint and understood that not all needs require immediate gratification. This example is directly applicable to behavioral finance: Controlling spending now may lead to significant benefits in the future.

Patience is not just a virtue—it may create its own success

There are a few steps you can take today that potentially could lead to greater retirement success tomorrow. They include:

• Enrolling in your 401(k). By setting aside money from each paycheck before you ever see it, you avoid unnecessary spending.
• Making a habit of saving and increasing your plan contributions. Some experts say you should save 15% of your pretax income each year for your retirement, including your 401(k) and IRA. If your plan offers any employer matching contributions, take advantage of these as well.
• Knowing when you may need professional advice. Those who lack confidence in their ability to manage their investments may be more prone to “cash out” at the worst time—at market lows—and wreck their retirement plan. Unless you are comfortable making your own investment decisions and making changes to your account as your retirement date nears, consider tapping professional advice that may be available to you within your employer’s retirement plan.

Self-control in retirement planning is key: By avoiding impulse spending and investing consistently over time to pursue rewards, you may move that much closer to securing your financial future.

1 Walter Mischel, The Marshmallow Test: Mastering Self-Control (New York: Little, Brown & Co., 2014).

Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.