Modern Retirement Theory Continued

Introduction

In our initial article, we introduced you to the Modern Retirement Theory (MRT) Concept. We also stated that we have embraced MRT as one of the foundations for how we believe Wealth Advisors should begin to redefine how to assist households in planning for and living well in retirement.

We have reviewed and studied over thirty-five various Retirement Income Techniques and Approaches that evolved since the passing of ERISA almost five decades ago.   We have drawn upon and synthesized what we felt was most beneficial from each approach so that we could formulate an understandable and repeatable framework for Advisors to work with clients, regardless of their net worth, to focus on the financial well-being of their clients to and through retirement.

With this stated goal, we focused on what has transpired since the great recession of 2007 to 2009. This led our research to the Consumer Financial Protection Bureau that was specifically created to support the financial well-being of Americans and assist practitioners and policymakers to empower more families to lead better financial lives. Upon its formation,” the Bureau undertook a rigorous set of research activities to understand and formally define financial well-being, for the first time, in ways that allow it to be measured and that allow meaningful comparisons between approaches to achieving it.”  It is interesting to note that they sought to gain a definition that could gain widespread acceptance across varied professions and disciplines; could be effective across a range of different economic, geographic, life stage, and other contexts, and would not need to be changed! In addition to this consistent definition, they sought to identify the knowledge, skills, behavior, and personal attributes that assist individuals to navigate the financial ups and downs of life particularly. The Bureau did recognize that personal drivers of well-being may be driven by factors beyond an individual’s control such as structural opportunities; the macro and microeconomic environment; family resources; abilities, as well as social and economic contexts. They concluded by stating that financial well-being can be defined as: “A state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future and is able to make choices that allow enjoyment of life.”

As one analyzes this definition, it is clear that it is a highly personalized state, that is to say, it is not fully described by objective measures but rather has four central themes; namely:

1. Having control over day to day, month to month finances
2. Having the capacity to absorb a financial shock
3. Being on track to meet one’s financial goals
4. Financial freedom to make choices that allow one to enjoy life.

The Bureau then, to fulfill its consumer protection mission, sought to identify the specific types of knowledge, behavior, and personal traits that help people achieve financial well-being. In the area of Financial Behaviors, four types were identified: 

1. Effective money management which encompasses intuitions and decision-making shortcuts (heuristics)
2. Financial research and knowledge-seeking, which support purposeful, informed decision making
3. Financial Planning and goal setting, which gives purpose and structure to individual decision making
4. Following through on financial decisions, the final and most important step between setting a plan and the desired outcomes.

They additionally found that personal attitudes, beliefs, and personality traits influence financial behavior and play a role in mediating the connection between knowledge and behavior. Specifically, the four major traits that they found are:

1. Comparing oneself to their own standards, not to others (an internal frame of reference)
2. Being motivated to stay on track in face of obstacles(perseverance)
3. Tending to plan for the future, control short term impulses, and think creatively when unexpected challenges occur (management mindset)
4. Believing in the ability to make decisions to influence their financial outcomes (understanding financial decision outcomes)

Lastly, we have reviewed the Demography of Americans and realize that there are currently 98.8 million Americans over the age of 54, with 56 million over 64. By 2030, these totals rise to 112.2 and 73.1 million, respectively. [1] With this demographic shift, collectively our two firms believe that advisors should rethink their practices as their primary client base is seeking holistic wellness and financial stability in this post covid 19 environment. Clients are concerned about the future and how they can feel secure and protected in the future.  In short, the conversations we are having with clients needs to pivot as well. Therefore, we have created a Financial Wellness Program centered around a Retirement Reality Check and Future Planning applied to the new demographic and its unique concerns about Lifestyle, Longevity, Liquidity and Legacy. This new customized program will be based on each household and its Values, Possibilities, Experiences, and Opportunities.

With this framework, it is recommended that advisors should learn, embrace, understand and implement a new and unique retirement approach, which includes the described wellness planning process. Our stated goal was to embody within the process all the past academic research and combine it with financial well-being research and efforts that are promulgated by the Federal Consumer Financial Protection Bureau and Whealthcare Planning. This combination will be one of the cornerstones of success as you, their Advisor, continue to serve retirees and their households in the coming years.

In the third and final part of this MRT series of articles, we will provide specific steps and conversational elements to aid advisors as they incorporate these important shifts into their client and prospect review sessions. We look forward to working with you as we continue to Redefine Retirement.

Resources:

[1] https://www.census.gov/

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