For many Americans, the idea of retirement is stressful. Do I have enough money? How much is enough? What if I have an emergency? What if I run out? There are many contributors to this anxiety, from the virtual elimination of pensions to financial recessions to wage inequality to the dire state of financial literacy in America.
Fiduciaries have an obligation to put their clients’ best interests first. What most people take this to mean is that a financial advisor must manage a client’s money responsibly and always use their clients’ assets for that person’s benefit, not their own. This is all true, but maybe it’s time to look at how we do that … and how we involve our clients in that decision-making.
How Much Is Enough?
Many clients get fixated on the numbers. How much do I have saved? How fast is it growing? Is there a better way to invest it? Do I have enough for retirement?
That last bit is tricky: what is “enough”? There are various rules of thumb. Fidelity’s, for example, is to save 10x your annual salary by age 67. This is, of course, informed by the 4% rule.
There’s been a lot of talk about the 4% rule lately, and its demise, but theories vary as to exactly what this means.
The problem is that rules of thumb like these seek to reduce an incredibly complex and constantly-changing discipline into an easily-digestible formula. Save X dollars by X age, then spend X% of that money every year until you die. Simple.
But “simple” doesn’t mean “right” or “best.” As CEO of Income Lab, Johnny Poulsen, puts it, “When it comes to drawing down a portfolio…simple rules are deeply flawed. Investors who choose to follow rules of thumb do so at their own peril.” One size does not fit all.
Retirement Income vs. Retirement Savings
So what’s the solution? There isn’t just one. That’s the point. Robert Conzo, CEO and Managing Director of The Wealth Alliance, uses cash-flow analysis to tailor his approach to his clients’ needs. “Cash-flow analysis allows us to focus on what the client truly needs, which in this case is planning directed towards cash flow concerns and secondarily, rate of return,” explains Conzo.
The idea is to focus less on ROI and more on what clients may need that money for. What non-negotiable needs are anticipated in retirement? What does your client want to be able to do on top of that? How much money will your client need coming in on a regular basis to meet those goals? It becomes less about “How do I help my client reach X number?” and more about “How do I help ensure my client's income will be sufficient to meet their spending goals during retirement?”
Conzo also advocates taking the time to educate clients: “For true financial planners, all roads don’t lead to insurance products or investments – but clients may not realize that.”
Life During Retirement — Emphasis on 'Life'
Mitch Anthony, founder of the Financial Life Planning Institute, has developed a concept called “Return on Life.” As Anthony puts it: “As advisors, we are conditioned to make sure our clients have enough money… But we really should be asking if they’re getting the best life possible with the money they have.”
With all the emphasis on saving enough, ROR and ROI, it’s easy for clients to forget why they’re saving to spend in retirement. The idea is not to have a huge pile of wealth that you hoard like a dragon from a storybook; it’s to live your best possible life and enjoy the hard-earned fruits of your labors.
On her blog, "Known Unknowns" Economist Allison Schrager flays traditional income frameworks for their lack of sophistication: “The problem with spenddown rules is that they assume that the objective of spending in retirement is simply not running out of money. Actually, the objective is… well, spending—and having some predictability around one’s income. Not running out of money is the constraint, not the objective.” Some things in life, and even in financial plans, cannot be boiled down to only hard numbers.
Managing 'Wealth,' Rather than 'Assets'
When you view your clients in terms of assets being managed, it’s easy to focus on the assets in a vacuum, to forget that those assets belong to a human being, and that their purpose is to help that human being live their best life in retirement. Wealth, on the other hand, is owned by someone, and exists to serve that someone.
In a January LinkedIn post, Institutional Retirement Income Council Executive Director, Michelle Richter, addresses some of the toxic ideas that arise from focusing too much on accumulation. She points out the difference between managing assets and managing wealth, imploring that we "retire the truly grotesque premise that there can be such a thing, from a financial perspective, as 'living too long.'”
As advisors, our job isn’t just to ensure that our clients’ assets grow as much as possible. Our job is to advise as well as manage their wealth for them. Not only are we obligated to help them build a large enough retirement portfolio, but also advise on how best to deploy their wealth in retirement.
And that’s the rub: for their entire working lives, our clients are focused on saving. But, eventually, they must spend; otherwise, what’s the point of saving it in the first place? Good savers often make bad spenders, because spending that money they’ve worked so hard to save requires a fundamentally different mindset than saving.
Low-cost income annuities, for instance, can establish a floor of guaranteed pay outs to add some certainty and peace of mind that at least some basic expenses may be covered. Cash-flow analysis can also help identify client needs and start a discussion about aspirations.
We need to develop other tools and frameworks that will help these conservative spenders (and others) spend more boldly. Our clients come to us because they need help ensuring that they’re taken care of once they’ve left their working years behind. That's why the shift from ROI to ROL, and emphasizing spending in retirement is so important. Let’s make sure we’re helping them live their best lives: ones where they can spend confidently, without succumbing to the pernicious fear of “living too long.”
David Stone is Founder and CEO of RetireOne, an independent platform for fee-based insurance solutions, including the Constance CDA