Retirees 'pasture,' 'play,' or 'purpose' intentions will suggest different financial needs and allocations in retirement.
This month's article is the third 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."
I put retirement in quotation marks because 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 retired 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 we will continue to explore the financial implications of the new definitions of retirement.
Planning for the Changing Definitions of Retirement
In last month's article, I offered three ways of looking at how people retire. Of course there are others, but these three P's can offer a framework for how we approach the task of retirement planning: "pasture," "play," and "purpose."
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. This definition is common among "the greatest generation" and the "silent generation." Retirement here consists of shuffleboard, bingo, and sitting by the pool chatting with friends.
Play: The play definition of retirement applies to those who change focus a bit earlier than typical retirement at 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 the Augusta National golf course, and taking 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, from working for fun (and a bit of money), starting a new business, volunteering, or other charitable or religious endeavors.
Retirement Planning for the Three P's
I recently read a study by Merrill Lynch that showed the percentage of pre-retiree workers who plan to a) work full time, b) work part time, c) cycle between work and leisure, and (d) never work again.
This scheme works reasonably well (not perfectly) with my three P categories. In my system, there isn't a category for people who work full time (essentially they don't retire). As long as they are working, they don't need to worry about money presently. This was only 5% of people in the Merrill Lynch survey. The other categories align reasonably well. Those who work part time align with my "purpose" category, the ones who cycle between work and leisure fit in my "play" category, and the ones who never work again would be in my "pasture" category.
As you can see, the categories are broken down reasonably evenly, except for those who plan to work full time.
Pasture: I look at this group as those who don't have a desire to work again and therefore need the most structured planning of all. They may indeed need to be on a "fixed income" and budget themselves carefully, depending of course on their level of assets. From an asset allocation perspective, I would be the most conservative with this class as compared with the others.
Play: The play definition of retirement applies to those who wish to engage in leisure but also may work at times. This fits well with the idea of "cycling" in and out of work and leisure. These folks can afford to take a bit more risk than the pasture category because they will work, but this work is sporadic and may not be regular. Therefore a moderate asset allocation strategy may be appropriate.
Purpose: I see this group as being dedicated to working part time. This category will be able to take more risk than the other two, assuming that the part-time work isn't 100% volunteer work that does not generate any income. From an asset allocation perspective, assuming a steady part-time income would suggest a moderate to growth orientation.
Of course all of this advice needs to be considered in light of the overall wealth level and spending patterns of the retirees in question. But this should give you a framework to start the planning process with your clients.
Next month we will begin a discussion on retirement statistics, so you can stay highly informed!