We planners and advisors face a psychological as well as a financial challenge in preparing clients for retirement.
Americans are obsessed with “winning the race,” chasing accumulation and net worth, not “finishing the race.” That is, many people do not focus on embarking on a lifetime plan that is consistent with their risk tolerance, aligned with goals and sustainable (if maybe not designed to make us multi-millionaires). Following are some personal observations on this psychological conundrum, gleaned from client experience, plus some ways I have used logical arguments to start to overcome it.
Americans have more personal responsibility for their retirement than ever before. 401(k)s have replaced defined benefit plans as the primary vehicle for retirement investing. Personal responsibility now requires the ability to be a disciplined, rational investor in difficult times, and many investors cannot do this.
This flawed approach to retirement stems from years of learning about accumulationand very little about distribution. A common situation that results from this is clients growing assets in their working years and then pursuing a “spend down” strategy at retirement with little thought given to how long that income might last.
It?s true that, in these times of more reasonable equity market growth, expectations of market return have lessened somewhat. However, many people still feel they can safely withdraw up to 6% or 7% from their retirement portfolio, when 3% or 4% is a much more realistic number.
In fact, one could argue that the greatest threat to investor return is investor behavior. The average equity investor earned a 2.6% annual return from 1984 through 2003, vs. 12.2% for the S&P 500 and 3.2% for inflation, according to a 2003 DALBAR study on quantitative analysis of investor behavior. This indicates that personal responsibility comes with a price.
Today?s focus should be on “finishing” the race. This requires a change in mindset.
First, everyone needs a dose of reality. As noted above, studies have shown that 3% to 4% is an achievable rate of annual withdrawal from a retirement portfolio while still preserving assets.