Lately I have been spending a lot of time thinking about and analyzing the mental and emotional aspects of retirement income. It started when I was shooting pool with a family member and asked, "If you were forced to retire today, how would you replace your paycheck?"  He paused, seemed about to answer but stopped himself and paused again. He ended his long silence with a straightforward answer that echoes what I have heard in dozens of similar conversations, "I don't know."

His answer didn't come as a surprise, but the way he expressed it opened my eyes to the mental and emotional stress he and many other baby boomers are going through. He really had no idea how he was going to replace his work income, and by being asked to think about it, he resembled a lost child in a large department store desperately looking for his parents.  

I want to emphasize the importance of that feeling because it can provide some helpful perspective for planners who are walking clients through retirement income decisions. Clients can be fragile when facing such decisions because they are confronting a new situation that's difficult to visualize and comprehend. It's a stressful time because the perceived stakes are higher; that is they feel if they are wrong they could lose it all. It's also nerve-racking because of the current economic environment, which is changing all the rules and making past strategies obsolete.

Low-interest rates, volatile markets, stagnate account balances and decimated home values have baby boomers running scared. Things they were told about accumulating wealth (save money, invest in real estate and diversify your portfolio) have been turned on their head over the last few years. Fears about the viability of Social Security and other entitlement programs have intensified clients' concerns about how they will live in the future. In short, new retirees are facing a monumental task: ensuring they have enough sources of income to last for the rest of their lives.

As advisors we have a powerful opportunity to reshape the retirement income landscape based on the mental and emotional needs of individuals. As part of our analysis, we must consider the meteoric shift from Social Security and pensions to personal savings as the primary means for creating retirement income. An advisor's retirement income conversations with clients should help relieve the stress they feel from the retirement transition and the difficult yet evolving economy, and also empower them to balance their desires for safety, yield, timing, consistency and flexibility.

Competing Responsibilities

As humans, we have natural tendencies to want it all and to want it right now, which is just not possible when it comes to retirement income.   The challenge for advisors then is how to best reduce or eliminate the stress of making a decision while sorting out the pros and cons of what I call competing options: rival product or service characteristics that are vying against each other for retirement resources. For example, the safety of an FDIC insured CD rivals the riskier yield and growth characteristics of a dividend stock. To not overwhelm clients, I suggest beginning the retirement income conversation with a simple five-question, two-word format that when placed on a single white sheet of paper or computer screen immediately lowers stress and fosters simple dialogue:  

1)    How Much?
2)    How Often?
3)    How Safe?
4)    How Consistent?
5)    How Flexible?

Low interest rates over the last decade or so have ushered in a "new normal" and have re-trained retirees to first ask, "How much money can you put in my pockets?" which begets, "How often will you be putting it in there?" In the past, the first question was about the safety of a product or service. Nowadays, people shop rates first, then ask about frequency. Only then do they begin measuring the tradeoffs between higher risk/yield products versus safety, consistency and flexibility. While that's not likely to be a major revelation, it is important because structuring your client discussions based on the order and direction of their thoughts fosters a likeminded, comfortable relationship in which their questions and concerns are being addressed through a delivery process that they can understand.  

In a nutshell, people are quickly overwhelmed by the need to preserve principal, generate consistent income and yet remain flexible. The natural tendency for many advisors and clients is to decide which factor is most important and then select a product based on that result.  But we as human beings have a dynamic risk tolerance instead of a fixed one. Thus, when the markets are doing well, clients think they should be doing well, and perversely when the market tanks, they don't want to lose money. Therefore, asking clients which characteristics they desire most from their investments won't provide that much insight on what products will work the best over the long run because what is most important to them is likely to change. Instead, consider the answers to those questions an impactful way to understand clients.

The fact is, there is no single best way to replace a client's work paycheck and they need to know that. In varying environments, different products and services work better for different people. Can you imagine being in CDs during the late 90s?  How about in 2008 or March 2009?  

I often tell clients, "Every investment is the best investment over some period of time," and with a short explanation their anxiety about making the right or best decision slowly dissipates. Consider sharing a recent client story or experience that allows them to see how the answers to those five questions can and will change over time. For example, I have a steady parade of clients who are calling me when their CDs are maturing because they want to and sometimes need to consider other options. Five years ago, these same people would scream at the mere mention of the word stock. By using actual examples, advisors can move clients from a fear of making a definitive decision with everything on the line to an acceptance that they can evolve and grow into as their retirement.  

Don't Forget The Details

Taking the time to gently walk a client through the mental and emotional aspects of retirement income is a great way to build strong relationships, but in the process don't forget the details!