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Retirement Planning > Spending in Retirement > Lifestyle Planning

There's No Auto-Pilot Setting for Retirement

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What You Need to Know

  • Worrisome events from around the globe have left late-career workers and retirees feeling very uncertain about the future.
  • Even in more certain times, the many financial and psychological challenges associated with life after work require constant adjustment.
  • Advisors should be prepared to have tough conversations with clients about the best ways to grow and protect wealth amid inflation and volatility.

Preparing for and transitioning to retirement is never going to be easy, but according to Mike Lynch, managing director of Applied Insights at Hartford Funds, it is clear that 2023 represents a particularly unnerving moment for late-career workers and retirees.

While the COVID-19 crisis presented severe challenges, Lynch says, these were relatively short-lived for late-career workers preparing for retirement, given that the associated recession was one of the shortest on record.

One probably has to think back to the Great Recession to find a time when there was more uncertainty for those contemplating retirement than the present moment.

“Retirees and pre-retirees just have so much to think about,” Lynch says. “From inflation to the lingering effects of the pandemic to the Russian invasion in Ukraine. It all leaves people feeling very uncertain about what their future holds.”

The essential realization for success in this moment, Lynch argues, is understanding that there is no auto-pilot setting for retirement. Achieving retirement goals, he adds, requires regular reviews and reassessment — as well as the ability to make adjustments to one’s approach and expectations.

This is true even for those who have accumulated significant amounts of wealth for their golden years, Lynch says, but even more so for those who are uncertain whether they have saved enough to leave the workforce for good.

Another essential element of retirement success, in Lynch’s experience, is preparation for the social and behavioral aspects of life after work. Many Americans fail to realize how much they rely on the day-to-day and week-to-week routine of a 9-to-5 job to give their life a sense of direction and structure.

In the end, Lynch says, this is a moment when financial advisors can provide a tremendous amount of value to their clients by engaging in more dynamic planning discussions that go beyond the portfolio and truly tie together all the different aspects of a real retirement plan.

The Financial Picture

Reflecting on his recent discussions with advisors and investors, Lynch says sentiments are somewhat more positive than they were in 2022, though there remains a lot of concern about inflation and the potential for a recession.

Amid the uncertainty, Lynch says, advisors are helping their clients grapple with the frightening prospect of negative sequence of returns risk and to right-size the amount of investment risk they are taking to match their retirement income and legacy giving goals. To address such issues, Lynch says, advisors can consider traditional bucketing strategies and improving diversification in the overall portfolio.

“Making sure that your clients are well diversified is something that is often talked about, but it is more important right now than ever,” Lynch proposes. “This is especially true once you are in retirement, because the portfolio and the plan can be so sensitive to big losses.”

Lynch suggests advisors should be prepared to have three distinct types of conversations with clients when it comes to their portfolio and its ability to fund their anticipated income needs in retirement.

The easiest of the three arises when a client has saved sufficiently and has a clear understanding of what they can expect to draw annually from their portfolio and for how long. In that case, the advisor’s job is relatively straightforward and it involves helping the client stick to the well-tested plan once they actually make the decision to retire.

The more difficult conversations arise when a client either significantly overestimates or underestimates their preparedness for retirement, and in Lynch’s experience, both are common.

In the former case, the advisor must help the client see their need to stay in the workforce longer or consider cutting back their lifestyle expectations. In the latter case, the advisor can encourage greater freedom in spending and help the client focus on legacy goals and community impact.

Pursing Retirement Clarity

As Lynch emphasizes, achieving perfect clarity about the retirement journey is not really possible, even when a savvy investor works in close partnership with a great advisor. Instead, the effort to navigate a successful retirement requires constant discussion, questioning and readjustment as life naturally unfolds.

“We all have this sense that there will be bumps in the road of retirement, but people often overlook the fact that there can be big positive surprises and not just negative ones,” Lynch says. “Yes, you may have a health crisis and require long-term care, but maybe your son or daughter becomes a highly successful entrepreneur.”

The key to keeping the ship moving in the right direction, Lynch argues, is the clear setting of goals and the contextualization of evolving money matters around these fixed objectives.

Lynch says one area where there is a particular lack of clarity is with respect to clients’ understanding of longevity. Many clients simply fail to believe that they have greater longevity than their parents’ or grandparents’ generation, even when they are told so by their trusted advisors.

“We still run into folks all the time who say, ‘Well, my dad died at 68 and my mom died at 75, so I’ll die at 72,’” Lynch explains. “They haven’t internalized the information that is out there about growing longevity.”

Others may appreciate the greater longevity they can expect, but they only see the obvious positive aspects and fail to overlook the risks that come along with greater longevity.

“Planning professionals know that greater longevity is a blessing but also a real financial challenge,” Lynch says. “Greater longevity does not just mean that everyone is going to live longer and have an easy time of it.”

Instead, greater longevity is also associated with a higher likelihood of experiencing challenges such as cognitive decline or chronic illnesses that will require some type of expensive long-term care.

The truth is that these risks are hard to hedge against in today’s marketplace, Lynch says, so advisors should be prepared to have some tough conversations with their clients about the best ways to grow and protect wealth for a potentially lengthy and volatile retirement period.

An Expanded Definition of Retirement

Among the other big trends Lynch is tracking is an evolving understanding of what “retirement” can and should mean. Should it be a one-time event? Should clients plan to transition slowly to retirement by first scaling back to part-time work? Should some clients keep working until the very end of their lifetime?

Lynch says there is no one-size-fits-all answer to these big questions, and he encourages advisors to have active and open conversations with their clients about such topics. For some, a clean transition from work to retirement will make the most financial and psychological sense, whereas other clients may simply continue working very late in life out of a true sense of vocation to their craft.

“My piece of advice for advisors is to be willing to ask those open-ended questions and listen to what your clients really believe about what ‘retirement’ should be,” Lynch says. “There’s no right or wrong here, just different preferences.”

Lynch urges advisors to be on the lookout for areas where either excessive fear or excessive optimism may be clouding the client’s vision. For example, a client with ample wealth and a well-built, diversified portfolio that was specifically crafted to withstand future challenges probably shouldn’t let their natural fear of inflation and volatility stop them from retiring.

“The advisor’s job here is to help lay out all the options and share useful information,” Lynch concludes. “It’s always hard to prepare for the unknown, but the baseline of good planning is the understanding that you can’t just expect things to be on auto-pilot.”

Photo: Shutterstock


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