Why 2 Million Dollars Could Make Your Clients Anxious

As we continue delving deeper and deeper into the financial picture of retirees and pre-retirees, the psychology behind how people think about retirement is really interesting.  A mentor of mine once told me that we should “retire” the word retirement as it doesn’t mean much anymore with the changing landscape of work, family, and the economy. In fact, there have been several studies that suggest the majority of individuals working today will probably continue working into retirement.

“What’s My Number” Mentality:

If you jump online and Google retirement savings, or watch some of these financial planning infomercials on TV, you will be hammered over the head with a philosophy concentrated on “what’s my number” as it pertains to retiring in the future. Basically, what they are suggesting to you (and your clients) is that there is a specific amount of money you will need in the bank on the day you stop working to continue to provide you with the income you need to live out those Golden Years.

I am convinced that this type of planning is both flawed and old fashioned. I submit to you that if you help your clients plan out this specific “number” and they actually hit it, you will stick them in a corner that could cause some serious paranoia as they age through retirement. I believe that there needs to be a serious shift in mindset from the old fashioned “what’s my number” philosophy to the more important “what’s my paycheck” mentality.

Let’s put this into perspective. You truly work hard at your job and you begin to achieve some serious success. You are socking away the maximum in your 401k plan, take the company match, and maybe get some nice stock options for 20, maybe 30, years. Your money is, of course, invested wisely and you achieve a reasonable rate of return. Your financial advisor runs all of your projections and sets you a goal of $2,000,000. They tell you that, when you reach that number, as long as you use a certain withdrawal rate, you will never run out of money.

On the surface you might think, “This sounds great! What’s wrong with that analysis?” The truth is, advisors are missing a very important item that should absolutely be discussed—when you achieve this level of success and hit your number, you are 100% guaranteed to spend down your assets—sending you on a psychological roller-coaster.

In the first few years you may experience a sense of euphoria—maybe even spend more money than you would in normal years because you want to check off some items on your bucket list. After you come back down from the clouds, you will start to withdraw money at the reasonable spend down rate, but this is where the problem lies.

When people work their whole lives building up a capital base (their “number”), it upsets them when they see their assets balance go down. Logically, they understand that this money was built up for this very purpose, but it becomes nearly impossible for them to just sit and watch it run down. This is why, often times, you will hear people say that the wealthier people in the world can also be the some of the cheapest. The reason: massive fear of this cherished money slipping from their hands.

The Retirement Lifestyle Shift:

So what do most retirees do when this phenomenon starts to sink in? You guessed it—they begin to downsize their lifestyle—to the point where their investment balances remain stable. In my mind, this is actually counter intuitive to what should be happening.

You worked your whole life to build up these assets so that you can enjoy everything in retirement and do the things you want to do. Instead, folks become frantic, thinking that every single month they are going to start running out of money. Who would have thought that the success of hitting that “number” could actually be devastating to your retirement down the road?

A New Mentality:

This is why, as advisors helping cleints plan for retirement, we should start to understand that all of our discussions with clients should revolve around the notion of “what’s your paycheck” and forget all about “what’s your number.” In my experience, working with dozens of advisors, I have noticed that the happiest people they get a chance to meet with for the first time are teachers, government workers, and others who have the luxury of receiving a steady pension from their former employers. They don’t have to think as much about the market or the statements they receive in the mail each month.

To us, this means that as you plan for your clients’ retirement you should strongly consider how much of their assets you can earmark to give them real, pension like, paychecks for the rest of their lives. There are many types of products that can solve this part of the equation, all being some sort of annuity.

The good news is that your clients should be familiar with these types of products as they (knowingly or not) already own one—Social Security (a paycheck that continues for life)! Annuities may work in a plan, and they may not. That is why it is important to work with your clients to determine where they might fit in the framework of thier entire financial picture.

One Final Question:

If you were to ask your clients and prospects, “If you had 3 million dollars in your accounts when you retire, do you think you would be happy?” I would venture to say that the vast majority of them would unequivocally say yes. However, I also submit to you that 10 years into retirement, emotions would take over and they might start agonizing about those account balances every day.

Ask them to picture themselves living in a beautiful location where they always wanted to retire, but all the while missing out on those things they promised themselves they would be doing in retirement because they’re glued to their iPad or TV worrying about what the markets are doing or watching account balances like a hawk.

Start to consider that notion of retirement being about a paycheck and not just about a lump sum. If they know the check was in the mail every month, how much fun would they have? How many of those bucket list items would they be checking off? Think of what this would do for your business in terms of client satisfaction and referrals.  It’s time to shift our focus.