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Retirement Planning > Saving for Retirement

How Much Do Your Clients Really Need to Work?

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Jason Hull is that rare financial advisor who thinks some of his clients should probably be earning and saving less and consuming more.

It should be noted that the Fort Worth, Texas, CFP’s clientele consists of small-business owners and people in “their late 20s, 30s and early 40s who have achieved financial independence.”

But Hull insists there is an important economic principle at stake that applies even to those who are not extremely wealthy. That is the idea that people prefer a smooth path of consumption, a paycheck as it were, to an alternating cycle of feast and famine.

To that end, even people of ordinary wealth may be guilty of trading in potential leisure time for earnings during their working years that can never be recovered.

As he put it on his popular blog: “Too little work, and we’re miserable when we stop working. Too much work, and we’re miserable while working and miserable afterwards because we rue the missed time.”

The young former Army officer knows of what he speaks, having founded a company and sold it last year before earning his CFP and establishing his RIA.

“Let’s think about the entrepreneur who has successfully built a company that is profitable, that can run without him or her,” Hull says in an interview with ThinkAdvisor.

“That entrepreneur is used to a 16-hour day…grind. So I find that with entrepreneurs going through that discussion and tying it to their personal goals, their values, what they want to get out of life causes them to make different decisions about their business than they might otherwise have made.

“There is life beyond your business; beyond your career,” he adds. “We sometimes get tunnel vision and we forget there is a finish line and once you cross it you stop running.”

The reason for that is another common principle of behavioral economics: inertia, the propensity people have to continue on their present course in linear fashion.

“I had a discussion just last week with an entrepreneur,” Hull says. “He is grossing mid-six digits a year that he’s pulling out of his business. I asked him ‘What’s next?’ He said he wants to earn $100 million. I asked him ‘Why?’ For him it was just a measuring stick; I personally feel there are better measuring sticks in life.”

For that behavioral bias, Hull proposes a simple behavioral solution. And that is to get clients to know their number—the vaunted sum needed for retirement. The reason is that knowing specifically what one needs frees a person to break out of the hamster wheel and live life more fully.

“It’s not necessarily that having a number means, ‘Oh, I’m going to retire now,’ the Hull Financial Planning principal says.

“Retirement isn’t the goal; financial independence is the goal because financial independence opens up options for you to pursue what you truly want to do.”

Hull cites the research of University of Chicago behavioral science professor Christopher Hsee, who conducted experiments rewarding people with chocolates or jokes appearing on a computer screen for work they performed.

Even though the participants couldn’t take the chocolates out of the lab (just as a person doesn’t take his wealth to the grave), people had a tendency to earn more than they consume. 

People also tended to earn so many jokes that they couldn’t read them anymore because they overwhelmed their computer screen space. But when Hsee asked some participants to predict in advance how many jokes they would like to see, that group tended to stop when they reached that number and were much happier than “higher earners” who had not made advance predictions.

To help his clients not over-earn and under-enjoy, Hull says it is essential to express clients’ “number” in terms of a monthly income. That is because a lump sum number “has no conceptual counterpart in their minds,” he advises.

“When you tell them it’s X-thousand dollars a month, then they can translate the retirement income into what they spend every month and the lifestyle they have.

“So if I spend $5,000 a month, the retirement number should translate into a safe withdrawal rate of $5K a month,” Hull says.

How do advisors determine their client’s number?

“It’s a function of what are their bequest motives. Do they want to leave their wealth to charity, to the kids or do they want to die broke? And what are the things they would like to shoot for but would be okay if they didn’t achieve? Then what is their current lifestyle and what is the bare minimum lifestyle that they’re going to have to have in order to gain retirement earlier?

“The next part is the safe withdrawal rate, which Wade Pfau and Michael Finke have done excellent research on.

“The third part is the decline in spending as you age and what I call ‘accounting for fogies:’ What are the significant downside risks I might face in later life, namely health care and long-term care?”

As for Hull, the financial planner doesn’t seem too stressed about his own financial ambitions.

“I sold a company. I have a good life. I want to be able to give back. I want other people to achieve the level of happiness I have.”

To that end, the planner is set to be a contestant on “Who Wants to Be a Millionaire?” on Monday in New York, and has pledged 50% of his winnings to the Wounded Warrior Project.

Check out Time to Retire the Idea of Retirement on ThinkAdvisor.


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