Despite considerable efforts to promote retirement planning, there’s substantial evidence that most workers don’t do a good job of planning for retirement. This evidence reveals a new opportunity to reconsider the industry’s basic approach to retirement planning and think through how we can make our processes more effective. We can’t just blame consumers for poor planning; we must improve our approach, and now is an excellent time to do so.
For other significant life transitions, planning is the norm. To prepare children for the transition to school, a “pre-school” system has been established, which we now often refer to as kindergarten. To prepare people for work, a wide variety of programs, including apprenticeships, work-study programs, and summer job internships, have been developed.
Unfortunately, there are no similar systems or programs designed to help people prepare for retirement. This absence provides an opportunity for financial professionals and retirement firms to fill in the gap. Indeed, this industry has the necessary tools and resources to help people prepare more effectively for life in retirement.
Through extensive research, Greenwald Research has found that a new paradigm is needed to engage pre-retirees and promote more effective retirement planning. This paradigm involves substantially broadening the concept of retirement planning by financial professionals and retirement firms to include guiding individual clients and participants through:
1) Considering the range of possibilities they have for life in retirement and helping them pick goals that are most meaningful to them
2) Understanding the typical patterns of retirement that they are likely to experience
We believe this new paradigm will motivate more people to do retirement planning, enable more effective saving and investing, and improve satisfaction with advisors, leading to more referrals and assets under management.
This is not to assert that this approach is not being practiced today. However, our research has found that most advisors do not focus on this broadened role and when they do focus on it, it is not always done optimally. The industry has not given advisors the most effective tools and training to take on this broadened role.
The Problem with The Current Practice of Retirement Planning
Retirements are not only longer than ever before, but retirees also have longer periods of good health than any prior generation. Today’s retirement provides an unprecedented opportunity for new meaning, rewards, and deep fulfillment. But many do not optimize this opportunity and do not do the most effective preparation for their lives in retirement. The industry’s approach to retirement planning and rules of thumb are based on the shorter, less healthy retirements that took place half a century ago and have often not addressed the new opportunities that most retirees have for a more fulfilling life stage.
Alas, many retirement planning efforts currently focus on the things people are least excited to confront and include rules of thumb that convey inaccurate messages. Many financial advisors approach retirement planning by focusing on investing and dealing with investment risk—two topics that people generally don’t get excited about. The two most cited rules of thumb about spending in retirement—the 4% rule and the replacement rate—convey a pattern of spending that most retirees do not follow and thus, suggest a way of life in retirement that is misleading.
The 4% rule assumes consistent spending in retirement, with adjustments only made to account for inflation. However, spending is often not consistent in retirement and usually does not rise with inflation, so the message behind the 4% rule leads to sub-optimal planning.
The concept of a “replacement rate” assumes that spending in retirement will be just like spending during working years, except that people will not be working. Thus, the replacement rate assumes no spending for things like commuting, work clothes, cleaning, and having lunch at or near work. Everything else stays the same. But for many, the concept of a rewarding life in retirement is more than just a steady income stream to support life without work. Retirement can, and should, mean a lot more than simply not working.
An important problem in motivating financial preparation for retirement is that most people don’t know what they’re planning for. They haven’t thought through what they want to do. It’s hard to know what your expenses will be when you don’t understand what your retirement spending patterns will look like or even know what you’ll be spending on. It’s also hard to get motivated to prepare for retirement when you don’t have a vision of what it’s going to be like.
It’s not surprising that most people spend more time planning for vacations that often last two weeks than they do planning for retirements that often last two or more decades.
Many retirement planning efforts develop accumulation targets without considering what people want to do in their retirement years. Very few do something that would be more valuable: help people think through what they want out of retirement.
Designing a New Paradigm for Retirement Planning
With all of these problems, what’s the solution? To be effective and attract interest, planning must go beyond a narrow focus on investments and do more than simply help people develop an accumulation target and an asset allocation plan.
But who is available to guide pre-retirees to plan for life in retirement or educate them on what challenges to expect? Financial professionals and retirement companies are most capable of providing this help.
Helping People Determine What They Want Out of Retirement
The first step is to help people think about what they want to do in their retirement. Two of the most effective techniques are scenario planning and visualization. Scenario planning has been used by many corporate and government entities but is not often implemented in the retirement planning process.
As former financial advisor Patrick Sullivan and psychologist David Lazenby stated in their book, Scenario Selling: Technology and the Future of Professional Selling, “Scenario planning puts possibility before goal planning because it is not always possible to set goals before evaluating possible solutions.” They went on to write, “If you put goals before possibilities, you get objections. If you put possibilities before goals, you get commitment.”
Some financial advisors report that helping pre-retirees visualize what they want to do in retirement has been highly effective. Greenwald Research has found that pre-retirees believe that visualization can provide valuable results.
We recently interviewed a retiree who started thinking seriously about what he wanted to do in retirement one month after retiring. He then recalled a wish he had as a young man: to take a trip around the world. He looked into it, felt uncomfortable about the cost, and decided not to do it. But he could have afforded this trip if he worked just three more months. In retrospect, he wished he had, but it was too late.
Providing Information about Typical Retirement Patterns
The second step is to provide people with key information that many simply don’t have about financial life in retirement, such as the typical stages of life and spending in retirement. These are often referred to as the “go-go,” “slow-go,” and “no-go” stages. Information about these stages helps people understand their future spending needs and helps them anticipate and prepare for retirement.
A great deal of information is available about the pattern of life in retirement that can provide critical insights to those soon to retire. We should provide this information to pre-retirees so they can more effectively plan for retirement.
Planning for the Future
Our research has found that adult children often play a crucial role in providing support for aged retirees and that retirees also provide vital financial support to their adult children.
As part of retirement planning, it’s critical that spouses have detailed discussions about their visions of retirement and that retirees and their children have conversations about their expectations and needs.
Adopting this new paradigm will, we believe, motivate more to do retirement planning and make the saving and investment side of planning more effective. The process to implement this new paradigm may be complex, but in our decades of talking to workers, retirees, and financial professionals, Greenwald Research has developed a firm view on how to execute it.
If you’re interested in discussing how we can develop a new paradigm for retirement planning together, contact us.
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