#2: What it takes to be retirement ready: health, wealth & happiness

Most people would agree that the goal for a successful retirement is to be happy, healthy and financially secure. The problem is that retirement education (as well as most research) has only focused on the financial side, without much discussion or examination of the happiness and health components. Without knowing what it will take to be happy in retirement (desired lifestyle) and the health that may be expected (good or bad), calculating future income need is really nothing more than a guess. As a result, few workers actually attempt a savings needs calculation. Instead they take an approach to save what they think they can afford, and then hope for the best.

According to the 2007 InFRE General Population Retirement Readiness Survey, American workers have their work cut out in the years ahead to prepare for all the varied aspects of a robust retirement. Below are the three main areas examined in the survey, a brief summary of each area’s results, and some pointed questions advisors can ask of their clients to help them become more retirement-ready.

Happy and Engaged: Although everyone says they look forward to retirement, the survey found only 13% of workers had concrete plans for how they would spend their time during the retirement years. Just two in ten had given a great deal or a lot of thought to what they would do in retirement to challenge themselves. Happiness-related questions advisors can ask their clients include:

• What are your life plans for retirement?
• What type of activities are you planning for?
• Will you work or volunteer?
• Do you have a network of friends outside of work?
• Will you relocate, or stay where you are?
• If married, does your spouse or partner have the same retirement goals and dreams?

Healthy: Although two-thirds of workers say they expect to be healthy in retirement, large proportions of workers are not taking steps that will help them maintain their health in retirement. Two-thirds reported they do not exercise regularly, about half admitted they do not eat a healthy diet or maintain a healthy weight, and four in ten said they do not have regular physical checkups. Health-related questions to ask include:  

• What us your understanding of your potential personal longevity and that of your spouse?
• What are you doing to maintain good health habits in order to remain active in retirement?
• How do rate your personal health situation and expected retirement lifespan to the number of years your money will likely need to last? About the same, less than will be needed or more than will be needed? 

Financially Secure: While some workers are on track to save the money they will need for retirement (34%), the majority are far behind schedule (56%). Consumer debt is one factor that hinders the building of wealth for retirement. Nearly four in ten indicated that their debt affects their ability to save a great deal or a lot. Moreover, more than one-third of workers said their debt had gone up over the previous five years. Wealth-related questions advisors can ask include: 

• How do you plan to support the lifestyle you want throughout retirement?
• How realistic do you think your income goals are for your future?
• What do you think are the greatest potential risks to your income that can negatively affect your retirement years?
• What percent of the income you’ll need every year is guaranteed to be there for your lifetime? How much then needs to come for your savings and last for your lifetime? Can you really afford to retire as soon as you want?

#1: Why what they do differs from what they know they should do: The basics of behavioral finance

Money Motivators. Middle mass and middle affluent clients fall into a range of various money-personality types. Understanding a client’s attitudes and feelings about money allows an advisor to suggest solutions that facilitate a client’s retirement readiness more productively than other options.

For example, consider a client you currently work with. Which of the following questions regarding their money motivations might appeal most to that client? Their answer can provide you with insights to the money motivations that influence their behavior and help you recommend more appropriate retirement saving and investing solutions.

Is your retirement safe and sound or sounding a little scary? This person is more motivated by Financial Security, such as having enough funds to last their retirement. These clients are well-served by the security of automatic saving and managed funds for the accumulation years and establishing a floor of lifetime income to cover essential expenses in retirement.

When you and your friends retire, will you be fitting in or missing out? Individuals with this motivation use money to facilitate Financial Belonging to feel they are a part of a particular social circle. Automatic saving and investing options can be effective in removing emotions from decision-making.

Do you see retirement as the time for living your dreams or dozing off? For this client, wealth represents Financial Freedom, where there's opportunities for the client to make creative and meaningful contributions in their sphere of influence. These clients are more willing to take risks, desire to maintain control of their assets, and work with an advisor to make decisions.

Will you be ready to go for the gold when your hair turns silver? A person with this money motivation gains a sense of Financial Success from their wealth, feeling that their money brings them recognition and a degree of power to influence others. These self-directed individuals desire to maintain control of their assets and money decisions.

Uber-Optimism and Reality. Some mid-market clients unfortunately make unrealistic assessments about their state of and ability to do their own retirement planning. While a sense of optimism is certainly beneficial for an individual’s psyche, a third-party, objective reality-check by someone like you is critical to help clients make informed decisions about when they can really afford to retire versus retiring because they’re eligible to. Surveys also show, for instance, that many people underestimate their life expectancy and overestimate their retirement nest-egg returns. Mistakes in either area increase a client’s exposure to longevity risk and make your job as their advisor harder, but evermore valuable. We all need some who cares enough to give us a constructive reality check!

Level of Involvement. To run an efficient mid-market advisory practice, one of the first assessments an advisor must make concerns the client’s desired level of involvement in the retirement planning process. By determining up front the role they expect/want you to fulfill, you will make better use of your time working with mid market clients.

To use a simplified classification scheme, client participation can fall into one of three categories:

Do it for me;
Do it with me, or
Let me do it by myself.

Mid-market clients in the first category (do it for me) are heavy delegators where the advisor bears a heavy fiduciary responsibility; trust and expertise are critical in this client relationship. Clients in the second category (do it with me) need guidance and direction from the advisor but nonetheless want to be involved in the process and decision-making. Clients in the third category (do it by myself) are best served by discount brokers or other direct investing options.

Practical Application for Advisors Interested in Serving Mid-Market Clients. What can you do to minimize problems created by behavioral influences and establish the solid foundation needed to help you best work with mid-market clients? Gain an understanding of their money motivators: Ask how their parents managed money, and whether the client continues that approach today. Did they ever have a life-defining event that involved money, like death of a parent at an early age, or a childhood of poverty? When there’s more month than money, do they pull out a credit card or delay the purchase? Do they participate in automatic withdrawal from their paycheck into employer-sponsored or other savings plans, and if so how much? Visit Dr. Kathleen Gurney’s site www.financialpsychology.com for outstanding, cost-effective resources to help you identify a client’s money behavior approach and more quickly get to the business of implementing the solutions they need to secure their retirement future.

Perform a quick, “back of the napkin” reality check. Divide the assets they have saved for retirement by the amount they need to withdraw every year to fully replace their paycheck as needed. How many years might their income last if inflation and taxes were to exactly offset investment earnings, and they don’t work part-time? How close is this number to the number of years they might be in retirement? If they were to work and save more for three more years, how much better off might they be? This quick insight allows you to determine if they can realistically have a retirement discussion now, or might your time with them be better spent encouraging them to wait a little longer and save more?
Money involvement: Find out if they want control and input over financial decisions, or if they’d rather leave the driving to someone else. Answers to these questions will indicate the direction of the types of solutions (do it for me or with me) to pursue on their behalf and can help cut down on the number of client meetings. Do it with me; or