Behavioral Science to Help Investors During Strange Times

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Steve Wendel: It may seem that, well, what do we have to worry about? The market's recovered! We're fine! But perhaps a client might say that, but as a financial professional, you know that we have no idea what's going to happen next. It may be that things keep on going up, and we're fine. Again, at the time of recording, the market was at an all-time high, but that may of course change tomorrow. It may change in a month; it may change in a year. We don't know, and the best thing to do is prepare for those contingencies. And you may not realize it, but this is actually the best time to prepare for such downturns. The reason is that we've had a recent--and very severe, of course--drop in March and April. And that is a recent memory that makes this stuff real. It makes it important, and people can say, "Yes, this is something that I should spend my time on." So the investor is more likely to agree to thinking about and working towards future downturns, working to prepare for future downturns.

The study I want to talk about is a two-parter. It's two studies, particularly focused on retirement. Now the setting is that as we help clients, as we help investors plan for the future, plan for their retirement in particular, we often have this in mind, specifically a mathematical model of a morbid mountain that people accumulate, accumulate, accumulate, reach retirement, and then start to decumulate. And our preretirement discussions are based on that understanding that people are saving for that future goal that they will then spend. And of course that affects their behavior during volatility, right? "What do I do? Am I going to lose out on this long-term goal? Can I stick with that? What am I afraid of losing? What am I afraid of? What am I going to gain?" The challenge is, that's not what we're actually seeing in the data. We're not seeing a morbid mountain. For a significant portion of the U.S. population, they're not spending their assets. There's no decumulation phase, at least not at what we envisioned it.

This is a study, for example, that we're building upon from EBRI that looks at how people spend over time in retirement. For this particular graphic, for those who have over $500,000 in nonhousing and investable retirement assets, they spend down about 20% of their assets in the first 20 years, which is astounding. This is on the median individual, which is astounding. And it's not what we're preparing people for.

And then second, we see very similar things, for even those that have far less income, far less assets in retirement. Though the means may be more modest, we find a very similar, slow decline, very slow decline at the median end. Again, if the median is slowly declining, it means that a significant portion--we find up to 40% of people accumulate throughout retirement, except to perhaps the very end, which is again strange.

So what we're looking at here is we're looking at that psychology of decumulation, why this happens, and how we can better prepare people to handle the shocks of life. So we believe that a portion of this is fear of future medical expenses. People will save, and save, and save, and then they're not willing to spend because retirement wasn't actually the goal when it comes to retirement day. It becomes a focus instead on future expenses, on future needs.