Advisors who think of retirement planning only as calculating a client's 'dollars per month' will limit their power to act in the new realities of retirement.
This month's article is the second in a new series called "Behavioral Finance and Retirement," which is intended to provide insight to advisors on the unique needs and financial behaviors of clients who are entering that period of transition called "retirement."
The reason I put retirement in quotation marks is that people today are not retiring they way they used to. The days of the retirement party, the gold watch, and sitting out one's years doing crossword puzzles and watching "Wheel of Fortune" are over for most people.
We've all heard the analogy that the baby boomers are like a baseball going through a garden hose. Well, the baseball is getting to the end of the hose, and it's not leaving without a bang! And before it leaves, it will be a financial force to be reckoned with.
To serve retiree clients properly, there are some key themes that advisors need to be aware of:
1. People are living longer than ever thanks in part to medical technology and better living habits such as diet and exercise. This is extending the length of time people are in a nonworking phase of life.
2. People's definition of retirement is changing, which is having a major impact on how individuals manage their finances.
3. In some cases, a certain segment of the population will have no choice but to produce some type of income after they leave the traditional workforce.
4. The responsibility of planning and investing for retirement has shifted in large part to the employee/retiree and away from corporations. As a result, behavioral biases significantly affect individuals who are entering or already in this phase of life.
Today many people are bumping up against the time when either they are no longer desired in the traditional workforce, no longer wish to be in the traditional workforce, or both. As advisors, we need to get inside their mindset as these events unfold.
The first step to getting a grasp on this issue is to understand how people are currently defining retirement. Many pre-retirees have a new vision of what they want to do after they leave the traditional workforce--and many want to do something useful and productive. These folks seek intellectual and social engagement. If people want to do something like this full-time, they need to know if they can afford it. Those advisors who can "step up their game" and embrace these trends will be successful going forward. Those who think of retirees as they have traditionally will likely have challenges.
In this article and the next we will explore the impact of the changing definition of retirement and explore various definition or classifications of retirement. Next month's article will discuss the financial implications of these new definitions of retirement.
The Changing Definition of Retirement
When you look up "retirement" in the dictionary, you find a number of variations on the theme including "to withdraw," "to go away," and "to retreat." Yes, there are some folks for whom this definition fits. However for the majority of working people who are nearing the age of 60, 65, or 70, none of these words seems to capture what is actually going on. What is happening today is quite different. Nowadays, people are taking concepts they learn in the corporate world and leveraging them into retirement. In the same way that many workers have become highly productive in their jobs because they take care of themselves mentally and physically--which is often encouraged and supported by companies–retiring workers are taking the same approach into the next stage of life. Retirement can now be a productive time of connection and engagement. The same factors that have redefined how we do things in the workplace--working a "normal" schedule of seven to eight hours per day (instead of being a workaholic) and balancing the need for power and money with a healthy lifestyle--are also redefining retirement.
To help simplify, I will offer three concrete, useful ways of looking at "retirement," what I call the three P's: "pasture," "play," and "purpose." When we think about clients' financial live, we should not think about a single "cut off" day in which they will have to live off an asset base. Many people are living out their years in new and different ways, and it is important to have a strategy for each approach.
Pasture: The pasture definition of retirement is simply what happens when you are no longer capable of working. This is the typical definition: the gold watch, the pension, etc. This definition is currently common among "the greatest generation" and the "silent generation." Retirement here consists of leisure activities: shuffleboard, bingo, and sitting by the pool talking with friends.
Play: This definition of retirement encompasses those who change focus a bit earlier than typical retirement of age 65 and embark upon a path of doing all the things they have been putting off or didn't have time to do while having a career. In this class of people, retirement means hang gliding in Rio, playing an Augusta National golf course, and going on a river boat cruise in Europe. These are the affluent baby boomers.
Purpose: This definition of retirement is when one chooses a higher calling. A myriad of choices are available, including working for fun (and a bit of money), volunteering, starting a new business, or other religious or charitable endeavors.
Since retirement is often discussed in purely financial terms, we tend to think of it as a fixed supply of resource (mainly money) that will be spent down over time--hopefully timing it such that the supply doesn't run out while the retiree still needs the resource. Therefore, traditional retirement financial advice is all about telling people to amass a large enough supply of resource and then warning people to wisely use the resource during one's lifetime.
The problem with this approach is that if this type of thinking dominates the planning process, it may result in letting the financial "tail" wag the retirement "dog." In other words, if we think of retirement as "dollars per month," we may limit our power to act, and this is not good.
The "old" way of thinking about retirement was as a transition from working life and "bowing out of the game." More enlightened people are letting their desire to be in the game define the process. What they want to do is driving the process, and they figure out a financing strategy to make it happen. Indeed, "retirement" as we have traditionally defined it, appears not to be the word that describes what people are actually doing. Perhaps a better word for this stage of life in the modern world is "evolution." We evolve from our current stage to our next stage. The idea of completely working to completely not working is not reality today.
Retirement is about "finishing the game," not simply ending a long career and checking out. I would love to hear financial advisors ask: "So what are you going to do when you hit "evolution"? But how they are going to pay for the new retirement is the next question. In April's article, we will discuss the financial implications of planning for the new definitions of retirement.