Retirees need to change the way they think about their money, says Michael Falk, a behavioral finance and investment management consultant.
They need to stop thinking about the assets they have and instead consider their wants and needs, according to Falk, a partner with the Focus Consulting Group, which helps advisors obtain and retain clients.
In a Webinar sponsored by the Retirement Resource Center, dubbed "Enough About the Assets Already!" Falk addressed the issue of how to have enough money in retirement. Financial advisors can help retirees think about their money in terms of "needs" and "wants" to help them have enough money for both.
Financial advisors need to help clients establish a spending plan that covers the needs first. For example, if a retiree has $3,000 a month available from Social Security, retirement plans and investments but has expenses that total $4,000 a month, the retiree may want to purchase a fixed rate annuity to cover the other $1,000.
Falk called this type of planning "immunizing the needs." The second step is to optimize the wants, he said.
The money that is left or money that is withdrawn from retirement plans or the portfolio can be used for wants, which can be adjusted or optimized, Falk explained. For instance, if the market goes down, a retiree could adjust and take a less expensive vacation, or the family could get by with one car.
To optimize the money covering wants, a retiree may want to continue working, at least part time, into retirement. Any money earned can be counted twice because it is money that is coming into the household and also is money that is not being withdrawn from the portfolio, he said.
The financial services industry is developing innovative products to cover the costs of people who are living longer. An example is the "advanced life delayed annuity." A 65-year-old could purchase this type of annuity now but not start receiving payments until he is 80. This makes the annuity less expensive than other kinds and also ensures money will be coming in when expenses tend to rise to cover health-care costs.
Life insurance can also be used as a tool in retirement. Instead of just providing a death benefit, the life insurance can include long-term health care coverage.
“Do your clients recognize your value is more than managing investments?” he asked. A service an advisor can bring to the client is to raise these retirement issues and start the conversation, he added.