The psychology of retirement income planning

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.