Jamie Hopkins: What Advisors Get Wrong About Retirement Planning

Adaptation is the theme of his book to be released March 31, "Your Retirement Sketchbook: 125 Retirement Planning Lessons from Financial Experts," co-written with Bonnie Treichel.

The guide delves into the vital areas of saving and investing for retirement, and managing retirement income, among many more.

Hopkins holds that advisors overcomplicate retirement planning and focus too much on the numbers. Put greater emphasis on the human side, he argues: "One of the biggest jobs an advisor has is taking away [the] fear … about running out of money."

In the interview, the president of FinServ Foundation talks about important issues and ideas that advisors should bring up with clients, such as gradually phasing into retirement and end-of-life planning.

Hopkins also discusses a "hidden" expense in retirement: taxes. Advisors need to monitor changing tax rules and understand how they apply to portfolios.

He sums up: "We need to think of [retirement] as ever-changing."

Here are highlights of the conversation.

THINKADVISOR: What are financial advisors and clients getting wrong about retirement planning?

JAMIE HOPKINS: Advisors overcomplicate and focus too much on the math, less on the emotional side.

The other [mistake] is that advisors [often] present retirement plans as: Here's what this Monte Carlo success-and-failure model says your retirement is going to look like.

Even the 4% rule of thumb is very static in its nature. It says here's this number you can spend.

All of that is way too finite for retirement.

Everything is success-or-failure based. The world is a lot grayer. Life is often about adapting and making small changes. But that approach really hasn't made its way into retirement planning.

Over the last 20 years, my approach has changed a lot. It's more of what I call adaptive-based. That's the [theme] of my new book. There are going to be things that we need to change and shift. As we go through retirement, we need to think of it as ever-changing.

THINKADVISOR: At what point will a financial advisor know that there'll be a shortfall in retirement income and then figure out how to boost it?

HOPKINS: Fairly early on [you'd know] whether there's going to be a risk of a shortfall because it's more about a person's behavior and relationship with spending than about the math and science of retirement income planning.

With clients that have, say, $1 million-plus of investable assets, it really comes down to the spending side. You can generate only so much more in investment returns or even guaranteed income.

THINKADVISOR: You write of the notion of gradually phasing into retirement. How would an advisor help a client do that?

HOPKINS: This is a big missed area of planning. People who phase into retirement are happier, the data shows. But most workplaces don't have a formal approach.

So it requires prompting — bringing it up with the client. Advisors are well suited to be that prompter. Next, advisors can help with the analysis around what this phased retirement looks like, and how it impacts the financial plan.

THINKADVISOR: But couldn't their employer say, "No, you can't cut back that way. Your job has to be full-time"?

HOPKINS: Yes, it's a risk when employers say we're not going to offer phased retirement or part-time work.

However, I think that more employers than not are open to this conversation. But you have to bring it up.

THINKADVISOR: Many clients are afraid to spend money in retirement. How do they shift from being a saver to a spender?

HOPKINS: There are two big reasons people don't like to spend. One is that they've given themselves permission to save over the years — but nobody has told them, "You're allowed to spend money on yourself."

A good advisor can tell a client, "You can spend. Here are your goals. You have enough money to meet them."

The second issue is the fear of running out of money. That's a real fear. People absolutely do run out of money.

So [many] clients feel, "I can't run out because there's no real way to fix it if I do."

You have to show that whatever their fear is about — longevity, health care or uncertainties of life in the future — you have a plan to manage a lot of those risks. That way, advisors can build some certainty in the client's mind that they're going to be OK.

This is one of the biggest jobs an advisor has: taking away all that fear and anxiety about running out of money and giving people hope and clarity about their future. A good retirement plan helps with the uncertainty about running out of money.

THINKADVISOR: You write that taxes are a hidden retirement expense. So working with the client on a tax strategy is critically important. Right?

HOPKINS: Taxes tend to be one of the top three expenses in retirement. The others are health care and housing. Taxes show up in a lot of ways, including [with] required minimum distributions, sales tax, income tax.

Hidden taxes just aren't known. Clients need to have someone watching out for their taxes because tax rules change frequently.

THINKADVISOR: Should advisors be educating clients, like telling them about Social Security options or perhaps the risks of alternative investments?

HOPKINS: A lot of survey data about clients who hire financial advisors say that one of the reasons they did so is because they want to be educated.

A little further on in that research, from the American College of Financial Services' Retirement Income Literacy Study, is [the finding] that most clients feel their advisors could do more to educate them on retirement-related topics.

At the advisor level, you have to determine how much you're already doing to educate clients, and should you be doing it with a mass-audience approach?

For example, are you presenting monthly webinars, news articles, email letters? Or are you relying [only] on your meetings with clients? In the last year, client appreciation and other live events have come back a bit.

One of my favorite educational approaches was done by an advisory firm I worked with: They had an onboarding process for all clients that explained how they were going to educate them across about 12 areas.

They talked about taxes, investments, Social Security [and so on] to help clients understand: This is the work we're doing for you, and it's aligned with the financial planning process.

Depending on the clientele, advisors are going to want to educate on different things. If working with business owners who have many real estate investments, you're probably going to want to educate them about alternative investments.

If you're working with mostly rollover 401(k) large-company employees, they're probably less interested in that because it's not going to have meaningful impact on their own retirement.

THINKADVISOR: Should an advisor broach the subject of end-of-life planning, such as assisted living and long-term care?

HOPKINS: They should bring that up early in the conversation, listed among the problems they're going to solve because you almost have to set the stage for it.

The United States tends to be a death-denying society. Probably less than 10% of Americans have an up-to-date and accurate estate plan. I think advisors are well-suited to bring this up with the client.

Estate-planning attorneys aren't the best suited to handle this because they tend to be transactional versus the advisor who's going to be back to review your plan and say, for instance, "You have four new grandchildren since the last time we met. Would this change anything about your plan?"

Financial advisors should be the prompter of end-of-life estate planning changes that come up.