Helping retiring clients switch from saving mode to spending mode, and feeling good about it, is one of the most important functions of an advisor, but one far too few have a plan for, said Jamie Hopkins of Carson Group.
The Omaha, Neb., firm’s director of retirement planning said the industry has gotten very good at getting clients to the retirement line but needs to be a lot more thoughtful about what happens next.
For example, most Americans are financially literate once they get to retirement, Hopkins said today during virtual symposium “Inside Retirement” sponsored by Financial Planning, but they are not retirement-income literate. They most likely understand average returns, but not sequencing of returns.
“It’s a challenge to put all that together,” he said. “When you look at Americans today, they’re stressed about what retirement means. Part of our job in this industry is to help people sleep better.”
Financial advisors can do the most to help their clients in retirement by teaching them how to spend their money in retirement, he said. After decades of saving, clients only know how to do that one thing, even affluent ones.
“Throughout the entirety of your work career, you’re basically told one thing: Put money away today in your 401(k), your company will match it, put it in a generally safe investment strategy like a target date fund that gives you a glide path, and we’re going to ride this thing to retirement,” he said. “This is the baseline system for the country.”
Hopkins said he has developed an approach to help clients move from being good savers to being good spenders, whatever that means in their situation. The idea is that if a client has fully funded their retirement three to five years before they stop work, it’s helpful to show them what spending looks like, and what a 1099R looks like.
“In essence that works as not saving anymore, because that person might be funded and in fact they could stop saving,” he said. “But we’ll put the money in and then take the money out as a distribution so they learn to spend. There’s a lot of value in this.”
In the same vein, Hopkins said he doesn’t like catch-up contributions, especially in the years right near retirement. He’d rather the client spend that money instead to make life more enjoyable while they stay in the workforce, as the benefit of that is much greater than the catch-up.
“Go spend it on a nice vacation, buy a new car, whatever it is to stay in the workforce,” he said.
Advisors also have to learn to solve the retirement income “puzzle,” which doesn’t end with a fat bank balance but with tax and estate planning, where the gap between what clients hope to get and what they’re actually getting is more like a chasm, he said.
“It’s the higher-level planning we can do, but it’s actually highlighting what I call the ‘trust gap,’ this misalignment between what consumers are looking for with a lot of these types of higher-end services and the services that they end up getting,” he said. “If we’re really going to make this whole industry and retirement income solution thing work and thrive out there, we’re going to have to bridge that gap.”
To Hopkins, the retirement puzzle includes first and foremost the ways in which people make decisions.
“Humans are messy. Decisions require emotion. In fact, when we try to remove emotion for decision-making, we make poorer decisions,” he said. “So we don’t want to remove emotions from our decision-making process but balance them inside of that process—creating frameworks and successful strategies, to encourage people, nudges to encourage people, guardrails to encourage people down a path that we know puts them in a good place to succeed.”
But the puzzle also includes moving targets of the three-legged retirement stool (government, employer, individual savings), public policy, industry development, and demographic and environmental changes. These are moving targets because the rules change, Hopkins said.
For example, that three-legged stool has changed a lot in the last 40 years, he said. When it comes to our culture, that, too, has changed in its approach to the funding of retirement.
“The onus of this has shifted away from the government and the employer onto the individual,” he said. “So all of a sudden we might have an unbalanced stool. It doesn’t mean you can’t still sit on it, but maybe one leg is longer than the other two and carrying more of the weight. How does that change the puzzle?”
And not least is the way individuals come to understand retirement. People figure out what they like to do for work by trying something, then trying something else and learning from these experiences, repeatedly honing in on a more specific goal. Figuring out retirement is a more vicarious experience.
“We often figure out retirement from other peoples’ experiences, not our own. We don’t live through retirement and then figure out what to do,” he said. “We watch our parents, our grandparents, our neighbors go through retirement, and we take their experiences and try to apply them to our own life. That’s very different from most of the ways we make decisions.”