The 7 deadly sins of retirement planning
Here's how advisors can approach a conversation with someone who suddenly realizes (or might not yet realize) they're not prepared for retirement.
You’ve heard of the Seven Deadly Sins. They have been around forever. In case you have forgotten, they are Lust, Gluttony, Greed, Sloth, Anger, Envy and Pride. Each plays a role when your client suddenly finds themselves unprepared for retirement.
Let’s look at them in a different order, because some are more obvious than others
1. Delaying too long. This problem aligns with Sloth. Your client thinks retirement is far off. They have been told to enjoy life while you are healthy, travel when you are young. They put themselves in a spending, not a saving mode.
Good advisors: You want to focus their attention on the long-term. “Retirement” seems like a far-off goal. “Financial independence” can seem a lot closer.
2. Assuming the good times will last forever. Now we are talking about Greed. Why aren’t they saving? Because their career is going well. They see themselves on an upward trajectory towards the executive suite. They can worry about retirement planning later, because they will be making lots more money… later.
Good advisors: Your client needs to have a Plan B. The pandemic has shown the unexpected can happen. In addition, firms merge or get taken over – there are winners and losers. Retirement savings can also be a nest egg.
3. Expecting a great lifestyle in retirement. Now we have reached Gluttony. This might have been possible when defined benefit plans were the norm. You knew what you were going to get far in advance. Your client might see retirement as the time they will take a world cruise. Dine out in fancy restaurants every week. Divide their time between their current home and the beach house they haven’t purchased yet.
Good advisors: You need to tactfully point out if the client can’t afford these luxuries while they are working full time, how will they afford them when they no longer have a salary coming in? They need to align their retirement lifestyle to their projected retirement income.
4. Thinking expenses will be much lower in retirement. The sin of Anger appears when your client realizes their overall expenses won’t decline by that much. Their optimistic perception comes from the logic they won’t be commuting to work, needing new suits, or buying lunch every day. However, Fidelity estimates expenses in retirement are 55 – 80% of the expenses when in full employment.
Good advisors: Your client needs to move from back of the envelope approximations to developing a comprehensive picture of their expenses in retirement. You can help with that project.
5. Feeling someone else should make up the income shortfall. Now we are talking about Envy. They have friends who planned ahead. Those folks are looking forward to multiple annual vacations. Cash flow is not a concern. Your client wants to be in their position. They won’t admit they didn’t adequately prepare, they feel it’s the government’s job to top up their income with increased retirement benefits.
Good advisors: You need to have the discussion that makes the point Social Security is only part of the client’s retirement income picture. It was never meant to be their sole source of retirement income. They are responsible for planning their own future.
6. Not factoring in inflation. This touches on the sin of Pride. Your client feels they are a great shopper. They hunt out bargains. They can keep expenses down. They don’t understand health care costs have risen much faster than inflation. They can’t live in the past. They must pay current prices.
Good advisors: You want to do projections and Monte Carlo analyses of what their retirement expenses might look like in future years.
7. Not realizing how long they might live. The sin of Lust relates to pleasures of the body. Your client might assume they will stay in good health and live forever. How long is forever? They haven’t thought about that. Will their assets get them to age 100? Then there’s the issue of health. People don’t want to think about it, but their ancestors died of something.
Good advisors: It’s a touchy conversation, but “what if” discussions need to look at catastrophic health expenses and/or the need for long term care.
Why are many clients unprepared for retirement? It’s often because of these seven deadly sins.
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