Redefining Retirement

Meanwhile, he adds, product manufacturers are struggling to figure out the guaranteed income and annuity question.

“How do you help people convert a lump of assets into an income stream? It’s huge,” says Daugherty. “People have been conditioned for 30 years to just amass wealth. In reality, they’re figuring out ‘Okay, I did that. Now tell me how to use that to pay my electric bill, my kids’ college tuition and my parents’ nursing home payment.’ It’s almost a new field. It’s also a permanent state of affairs in terms of this broader way of thinking. So get ready for it. There’s no turning back.”

Examining Assumptions

With Social Security, Medicare and corporate pensions under threat, many Americans feel they have lost their safety net. For a lot of people, the assumption that their house would be paid off in retirement is also off the table. Then there’s the drama surrounding health care.

“That’s the conversation that always takes the air out of the room. People are afraid. They don’t know what to do. Health care is the 800-pound gorilla,” notes Ed Lynch, managing director and chief retirement officer of Dietz and Lynch Capital, a Massachusetts-based investment management firm.
Advisors, meanwhile, are rethinking risk.

“You see advisors breaking down retirement portfolios into buckets and different levels of risk — trying to create a low-risk plan, high-risk plan, short-term need, long-term need. Seventy percent of your lifestyle used to be a back of the envelope retirement calculation,” notes Philip Palaveev, president of Fusion Advisor Network. “It’s become much more complicated than that and it’s creating uncertainty not just among advisors but investors as well. Do we really know what we need to know in order to get to where we need to be?”

Against that bleak backdrop, Olivia S. Mitchell, a professor of insurance and risk management at the University of Pennsylvania’s Wharton School and executive director of its Pension Research Council, worries that there is “precious little discussion and thinking around: What if I am still here on this earth at 95 or 105?”
She is among a small core of academics who are encouraging advisors to reframe the retirement conversation to help clients focus more clearly on future income needs.

Instead of talking about the 70 percent income replacement rule, she recommends, discuss with clients how they are going to achieve spending cuts of 30 percent. A fan of annuitization, Mitchell suggests explaining the true value of insurance: For automobiles, it is 60 or 70 cents back on the dollar. For health care, it’s about 50 cents. For a simple annuity, she says, it’s 95 cents or more.
“You have to cast it in terms of the value for the money and protection you are getting. If cast as an investment, people just don’t understand,” says Mitchell, author of the upcoming book Revisiting Retirement Payouts. “It’s all in the framing. If you talk to people and say the insurance company is getting $100,000 of your money and you can never get it back, it skews against. If you say: ‘By purchasing this annuity, you have income for life. Even if you become demented someone will pay your bills,’ that’s very persuasive.”

While behavioral finance is the darling of academics, it’s getting a huge real-time workout in advisors’ offices today.

Lynn Ballou, managing partner of Ballou Plum Wealth Advisors in Lafayette, Calif., operates a practice that puts a human face on all the survey data. Many of her late-career clients have reinvented themselves: a nurse who opened an eldercare business, a pilot who became a photographer, and a human resources manager who is now a rafting tour guide. One woman, who works for a major pharmaceutical firm, is at her peak — and still loving what she does every day. Other clients, meanwhile, have been advised to press the pause button instead of retiring as planned.

“This generation thinks it can do it all, have it all, and live a really long time. That’s great. However, they’re asking their portfolios to support them for 35 to 40 years and the math isn’t making sense,” says Ballou. “People are realizing the government isn’t going to lower your taxes, your portfolio isn’t a guarantee and you’re kind of on your own. What that means for us as advisors is a lot of heavy-duty psychological sorts of conversations on: What does that feel like for you? We’ve been starting with the numbers, and often that tells the story. I don’t think it’s been a shocking revelation to anyone, but it’s been a difficult revelation for some who had plans.”

It’s not lost on advisors like Ballou, Strebel and Lynch either that their practices have become a reflection of themselves. Like a lot of their clients, they are in their 50s and pondering many of the same issues as they approach their own second acts.

“It’s kind of like people and their dogs. We start to look like our dogs after a while,” says Ballou. “The joy of my life, why I’m in the sweet spot of my profession, is that for 30 years I’ve grown up with these people, put their kids through college, cared for their parents and then helped them segue into something they are passionate about. It’s part of the evolution we are all going through personally. It’s really interesting and exciting to be part of this moment in history.”