Journal of Financial Planning: July 2023
Danielle Andrus is the editor of the Journal of Financial Planning. She can be reached HERE.
The COVID-19 pandemic provided many of us with a lesson in resilience as we spent months learning how to make and maintain connections with people when we couldn’t be with them physically. Drive-by birthday parties and holiday gatherings on Zoom were better than nothing but poor replacements for the kinds of emotional connections we were used to.
Today, clients’ concerns about COVID-19 are waning, but as the post-pandemic fallout continues to stress markets, it’s a reminder that clients in retirement with few options to replace income lost to unforeseeable events need backstops built into their portfolios to protect them when things go awry.
Resilient Retirements in the DC Era
James Mahaney, CFP®, founder of Mavericus Retirement Services and author of How to Craft a Resilient Retirement Income Plan, witnessed his parents, who were early 401(k) owners, suffer during the tech downturn of the early 2000s.
“I’ve had this idea over the last 20 years that we really need to have retirement income we count on now that defined benefit pension plans have gone away,” Mahaney said. “Essentially, we have our Social Security and we’ve got our 401(k) and IRA savings; for most of us, that’s going to make up the bulk of our retirement wealth.”
As of the fourth quarter of 2022, U.S. retirement assets reached $33.6 trillion and 30 percent of all household financial assets, according to the Investment Company Institute.1 Nearly 62 percent of those assets are in IRAs or DC plans. Of the $9.3 trillion held in employer-sponsored DC plans, $6.6 trillion was in a 401(k).
Fidelity’s latest Retirement Savings Assessment, which looks back at 2022, found that 52 percent of Americans are facing a retirement where they will have to make at least modest lifestyle adjustments to avoid running out of savings, and 34 percent will have to make significant lifestyle changes.2
Mahaney believes Social Security is a fundamental part of retirees’ income strategies and encourages clients to delay taking benefits until it makes sense for their financial situation, especially for clients who are higher earners.
“Instead of taking that right away, we should be trying to optimize” claiming strategies, he said. “Try to delay Social Security for the higher earner, assuming that their health is in good shape, and then use some of one’s savings to bridge to that higher, delayed Social Security [benefit]. If that covers essential expenses, then you’re in pretty good shape.”
From there, planners can help clients make adjustments year to year based on their discretionary income to build resiliency, Mahaney said.
Economic Challenges
Clients are getting a crash course in the impact of inflation on their portfolios. Inflation reached 5.7 percent in 2021 and 5.5 percent in 2022, according to the Congressional Budget Office, the highest point in the previous 40 years.3 CBO predicts that inflation will gradually slow over the remainder of 2023, anticipating it will reach 3.3 percent by the end of the year.
“We’re seeing what a big help the cost-of-living adjustment is,” Mahaney explained. “What a lot of people don’t realize is when you delay Social Security from, say 62 to 70, you start at a much higher base, but you get those incremental changes with the cost of living. It really can help people create that resilient retirement.”
Clients may find it comforting to think there’s one, unchanging number they can build a plan around, but they need a more dynamic strategy than to start withdrawing 4 percent and adjusting for inflation as they go.
“One of the big problems with the 4 percent withdrawal rule [is] if you actually did follow it throughout retirement . . . there’s a good chance if you’re invested in the market, you might end up with a lot more money than you were counting on; you could have spent more money during retirement,” Mahaney said.
He stressed that making prudent adjustments as needed, under the guidance of a financial planner, is not the same as frantically rebalancing at every market dip.
“We’re going to embrace a strategy that makes adjustments as needed; we don’t want to be doing any panic selling,” he said. “We’re going to use Social Security as a foundation to a resilient retirement income plan, so you won’t feel like you’re not going to have money coming in.”
He added that this can be challenging for older clients, especially couples, because “you don’t want to leave your spouse holding the bag once you’re gone, and you don’t want to be forced into low-yielding accounts that aren’t really going to generate much earnings, if you will, because they’re afraid of what might happen.”
Emotional Resilience
Even the best-laid plans, as we all know, can be waylaid by bad timing, impulsive decision making, or twists of fate. Planners can help clients build their confidence knowing they have the financial standing to absorb these losses, but they need emotional fortitude as well.
Edward Jones surveyed 12,000 pre-retirees and retirees in the United States and Canada in the first quarter of 2023. The survey, “Resilient Choices: Trade-Offs, Adjustments, and Course Corrections to Thrive in Retirement,” describes clients’ experiences with change in retirement.
“When we surveyed pre-retirees and retirees, it really became clear that when retirement happens, it’s not a static situation [where] you sat down with your financial adviser and determined, ‘here’s my plan for the next X years, retiring in my perfect lake house.’ Life happens,” noted Lena Haas, principal and head of wealth management advice and solutions at Edward Jones.
Planners can help their clients prepare for these “curveballs,” Haas said. “These are small setbacks, small things, and as long as you’re prepared . . . those things don’t really derail you.”
Clients will also face “cannonballs,” though; some that can be anticipated, like the death of a partner, and others that are more uncertain like sudden illness.
“Those are truly life altering setbacks, not just financially but emotionally,” Haas said. “In those situations, what we saw is that Americans are really resilient, even when huge things happen. They don’t passively sit back; they recover and are very willing to say, ‘This is not how I thought it might be, but I’m going to be proactive, and I’m going to do something about it.’”
Haas suggested that planners help clients prepare for these changes with scenario planning. She added that not all of the changes retirees face will be negative. The survey found over 80 percent of respondents expect positive changes in their retirement that affect their course of action, like welcoming a grandchild or receiving an inheritance.
“Lots of times we focus on how to handle the negative, adjust to the negative, but there is a lot of happiness that happens in that chapter of life,” she said.
Haas encourages planners to undertake “deep discovery” with their clients, bringing in family members and partners, and asking questions about what makes them happy, how they want to spend their time (and with whom), and what gives them purpose. She suggests planners talk to clients individually and as couples or families to learn about how their values and expectations differ from one another.
Planners are ideally suited to help their clients set and enforce boundaries around their finances. The “Resilient Choices” survey found that while majorities of retirees and pre-retirees in relationships said they and their partner were on the same page about their objectives and expectations in retirement, 49 percent of retirees and 59 percent of pre-retirees said they needed to put their foot down on financial gifts made to family members and friends.
“It’s also important to establish boundaries financially. We heard the idea that we can’t just be a family bank, even with our children and certainly other family members; we need to establish boundaries,” Haas said. “That doesn’t mean we don’t love them. That doesn’t mean we don’t want to help them, but there needs to be that clear, transparent delineation. Doing that up front as a financial adviser, that’s priceless because that really takes the emotion out of it if a situation does arise.”
Road Testing Retirement
A big part of establishing resilience in retirement involves managing the transition from a mindset of saving to spending. Having a retirement income plan that can “withstand the bumps—whether it’s inflation, whether it’s market risk, whether it’s extended longevity and you’re living longer than perhaps you planned for,” is only part of the challenge, according to CERTIFIED FINANCIAL PLANNERTM Mahaney.
“To just say you’re going to flick a switch and spend it all after we told you to save it for the last 40 years is not easy,” he said.
Edward Jones’s Haas encourages planners to help their clients live out a “test drive” before they retire. Once they have a budget for retirement expenses, try to live on it for two weeks, she said.
“There’s a big gap between intent and action when it comes to planning and living out the plan. Injecting that dose of reality and modeling out various scenarios is where a financial adviser can transcend the focus on investing only and become the trusted financial partner in life.”
Endnotes
- See www.ici.org/statistical-report/ret_22_q4.
- See https://newsroom.fidelity.com/pressreleases/fidelity-research--america-s-retirement-preparedness-level-declines-amid-continued-volatility/s/c57ac0e9-9c5c-4f5c-938c-cdf82a3aa7b1.
- See www.cbo.gov/publication/58957.
Sidebar
Avoiding Retirement Regret
Fifty-six percent of retired women had to make lifestyle changes as a result of their financial situation, according to the “Resilient Choices” survey from Edward Jones. However, although retired men were less likely to need adjustments, they were more proactive when they had to be, including by reducing debt, sticking to a budget, rebalancing their accounts, and talking to a financial planner.
This is a clear opportunity for planners to assist retired women, Edward Jones’s head of wealth management advice and solutions Lena Haas said, because their problem was not in resisting change, but in knowing what financial changes to make.
“Women are actually very willing to make adjustments when it comes to the non-financial pillars of retirement. When it comes to their family situation, when it comes to their health and well-being, when it comes to their purpose, they are willing and in fact do make adjustments more frequently than men.”
Twenty-nine percent of women sought financial education and advice, compared to 33 percent of men, the survey found.
“If I think about our collective opportunity there, I think it’s to reach out to women and educate women about the options available to them,” Haas said. “Give them that relationship that they need, the advice that they need, the confidence that they need, because there’s clearly that appetite for adjustments, and just not enough information and confidence to make those.”
