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The psychology of retirement income planning

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I am a sucker for a good retirement income planning study. Whether it’s an analysis of various safe withdrawal rate strategies, bucketing, or essential versus discretionary, I enjoy the process of aligning the income puzzle pieces to fit in such a way that income planning success is optimized. Maybe you share in my joy; maybe not so much. Either way, it’s the plan’s implementation and the client’s commitment to the plan that ultimately impacts their life.

While the methodology and mechanism of any particular income planning strategy must work and be mathematically sound, what determines the clients’ satisfaction with the plan is the interface they experience with the planning tools and with your firm. Leaving this interface to chance may result in a very poor experience for the client, even while you feel like the smartest person in the room having put this amazing plan together for them.

What is this interface? If you’re a user of Apple products, you know what their interface feels like. It’s almost as if the product knows how you want to feel when you use it. While one could argue that another manufacturer has better software or technical components, Apple is successful largely because of the interface it provides for its users. Similarly, the recent opportunity to drive six new Porsche cars in a single day left me wondering: “What was that feeling and why was it so special?”

Creating a powerful interface for our retirement planning clients requires that we consider the psychology of the phase of life they find themselves entering. To be considering retirement, they must have been reasonably successful accumulators of wealth. They developed and stuck with solid savings routines that resulted in the growth of their assets. Now, they find themselves faced with the very foreign concept of decumulation using the money they so diligently saved.

Consider a couple that has navigated decades of marriage together. It is typical that one of the spouses is comfortable discussing investments and financial matters. The other spouse is now realizing that he or she had better start to figure this money thing out before irrevocable retirement decisions are made. To this person, who hasn’t even a basic understanding of investments, I want you to offer a detailed explanation of how targeting safe withdrawal rates works. Make sure you cover portfolio rebalancing and how to adjust the withdrawal strategy to minimize taxation through tax loss or tax gain harvesting. That’s the equivalent of shipping someone a box of parts and telling them their new computer is in there. This is not a great client interface.

This is not to say that a particular income strategy is better or worse than another; it’s simply to illustrate that our clients want to walk away from our discussion with a feeling that they were heard and their concerns are being addressed in the planning prescribed. In other words, they’re asking us to have considered the psychology involved and the deep needs they have.

In a recent meeting, a husband shared with his wife that he wanted to be done watching the stock market’s ups and downs. The experience of losing a tremendous amount of money in 2008 was still seared in his mind, and he didn’t want to experience that again. She grabbed his hand as if to say, “It’s OK.” While there are many other factors to consider, this couple chose to implement a guaranteed income annuity strategy to meet their essential expenses, while remaining in risk-based investments for their discretionary needs. It satisfied their psychology and allowed us to build an interface for them that will likely lead them to tell others about their experience.

Winning the “inner game” in our business is no easy task. We struggle to know ourselves, much less know exactly how others are feeling at any given moment. What we can do is avoid projecting our beliefs and our desires onto others. Just because you love building a particular type of income plan doesn’t mean it’s best for the client. We must be well-versed in all planning strategies so that we can suppress our own need to be the smartest person in the room. After all, we need to be the best advisor for the clients we serve, offering the interface that allows them to live the rest of their life fully. It’s no easy task, but what a reward when we get it right.