The focus of the 401(k) industry has been on helping people save enough for retirement just beginning to help create a paycheck for life or provide guaranteed retirement income. But very little is discussed about how to prepare people emotionally to transition from a structured schedule with inherent social networks for their past 60+ years to what can be a daunting amorphous life in retirement - overnight.
The wealth management industry has been moving away from starting with a financial plan to better understanding a client’s need and personal situation and then forming a financial plan which evolves over time.
And while behavioral finance, which is the convergence of economics and psychology, has improved plan design and the accumulation phase of retirement, that dynamic has yet to be applied to helping people emotionally as they transition into retirement.
According to a Greenwald study, 74% of people have made serious efforts to plan financially for retirement yet just 35% plan emotionally. Stuart Ritter, Retirement Insights Leader at T Rowe Price, told a story at a TPSU program at Texas State about a retiree who had plenty of money for retirement but did not plan for his new life. After four days of sleeping in, the newly retired person did not know what to do so he eventually started picking fights with his wife. Eventually, he went back to work part-time as part of the phased retirement megatrend.
Mark Chamberlain, co-founder of Lakeside Wealth Management Group now part of CAPTRUST, asks clients approaching retirement three questions:
- Are you prepared to dramatically increase the amount of time you spend with your spouse especially if they are also retiring?
- How are you going to replace the social network you have developed at work?
- What are you going to do with your time after working 40 hours/week for 35 years? (Men are particularly challenged.)
To help his clients prepare for retirement, Chamberlain set up an informal mentoring program. He asks clients already in retirement to speak with people about to retire about how they deal with their new life. People are prompted to speak about their biggest mistakes and their biggest surprises.
Ritter went through an exercise at the TPSU program, much of which is captured in a T Rowe Price workbook, to help people prepare for retirement which includes:
- Examination of your social network comparing where they spend time during work with where they will spend time in retirement;
- Who they will spend time with and provide support before and after as well as who they might need to support;
- Ranking activities before and after and what provides them the most fulfillment which may need to be replaced; and
- Where they want to live based on various factors like family, cost of living and access to good healthcare.
UCLA Professor Shlomo Benartzi, who introduced behavioral finance to the 401(k) world along with University of Chicago’s Richard Thaler, has spent the past few years creating tools to help people to prepare financially for retirement through PensionPlus. While auto features might work well for accumulation, Benartzi believes that personalization is needed for retirement income based on gender, health, risk tolerance, phased retirement and travel plans, when they want to retire and whether they want to leave money for their heirs which requires elusive engagement.
Joe DeNoyior, TPSU Adjunct Lecturer and President of Hub’s Retirement and Private Wealth division, starts his presentations with the key issue: how to help employees prepare for their longest period without a regular paycheck.
But how do we prepare people who have spent a vast majority of their time at school or at work where they have developed a strong social network and, for many, their identity, to create new networks and even new identities in what can be a completely unstructured environment?
Which gives “preparing for retirement” a whole new meaning providing advisors the opportunity to distinguish themselves as plan sponsors look for advisors to help employees, saving them time while acting as an objective third party, while advisors, many stuck in the anachronistic Triple F business model, still see their value based on improving fund performance, lowering fees and the number of activities. The world of retirement planning is changing so it’s only natural that advisors, the “travel agents” of the journey, also need to evolve.