Modern Retirement Theory: Part 3

In this final installment of our 3-part series on Modern Retirement Theory (MRT), it is important to take a few moments to review what was covered in the first two articles so we have a foundation of what we have covered and what we will cover in this last article.

Part 1 introduced the concept of MRT and its applicability to Wealth Advisors (the what). In that article, we also noted that we believe MRT will redefine how successful advisors will be able to assist households in their plans for living in retirement in a manner that is individualized and centric around the clients' specific priorities, needs, wants, and wishes for the next stage of their life.

 In the second installment, we addressed why that underpins MRT. Utilizing insight from the authors of the theory (Branning and Grubbs), we outlined that there are six fundamental premises namely:

1. Retirement is an absolute goal, not a relative one.
2. Planning and executing retirement funding should focus on individuals rather than historical data or group statistics.
3. The future is unknowable to anyone and that future events are always unknown to individuals.
4. Retirement funding should consider how to best utilize the individual’s or household’s entire balance sheet not just an investable portfolio, including off-balance sheet items such as Social Security and pensions.
5. A hierarchy of priority retirement funding can be established to offset retirement risk.
6. With these premises, one can then provide a client a Safe, Secure, and Sustainable Retirement. 

Finally, we included the research and materials of the CFPB (Consumer Financial Protection Bureau) to validate why this approach and tactic is so important at this time in the United States.

This final installment will provide the how and outline the implementation and impact aspects of MRT on the retiree and/or the soon to be retired marketplaces. We will bring all the components together so that both advisors and individual clients can understand as well as establish the foundational building blocks into their conversations and plans.

So that this process can be more understandable and communicable, we have constructed it in a series of fours: four concepts to each building block. The first of these building blocks addresses, in a new way, how to segment individuals by age to effectively analyze retirement planning. This age-based approach may be a little confusing to some but upon further research and contemplation, it makes a great deal of sense. The four age blocks are as follows:

• age 50 to 60
• age 60 to 70
• age 70 to 80
• 80 plus

Currently in the United States today, individuals acquire 2/3 of their retirement assets beginning at the age of 50 and beyond. Thus, this is the ideal age group to discuss their plans for preparing for, transitioning into, initially living in, and finally late retirement. This 40-year methodology is new. We are now planning to get to and through retirement as a household, and this new focal point is extremely well received in the marketplace today. 

Secondly, the next major building block contains 4 separate discussions to have with the client, the 4 L’s, namely:

1. Client’s current Lifestyle as well as their future lifestyle that they desire in retirement
2. A discussion centering around the health and Longevity of the clients and family
3. A discussion that centers around their Liquidity assets and balance sheet necessary to maintain their lifestyle
4. The anticipated Legacy that they would like to leave behind.

The third major building block centers around their happiness and lifestyle in retirement. It also includes 4 major topics to discuss in this next key building block.

1. Housing - Now and in the Future
2. Personal Activities - Now and in the Future
3. Family Activities - Now and in the Future
4. Health Maintenance - Now and in the Future

Once these conversations have been held, it now becomes necessary to introduce a discussion concerning reframing and reshaping the contexts of retirement thinking and investing. Modern Retirement Theory is created based upon Maslow's hierarchy of needs attached to investing for individuals in retirement.  People desire safety, security, and surety once they leave the workforce either fully or partially.

These are the four elements that create the type of retirement plan that is individualized to each household and not based merely upon the projected rate of return and probability of success. This customization aspect is the key ingredient to success as it is personalized – not based on long-term averages or the law of large numbers. The first element is to create a Foundation Floor or Base Fund that will address the basic living expenses for the household regardless of market conditions. The second element piece of the overall portfolio is the creation of the Household Safety Fund. Within this portfolio are all the healthcare insurance policies, health savings accounts, and liquidity needs associated with unexpected issues that may arise. The third piece is the aspirational portfolio or could be titled a Discretionary Fund which has an investment time horizon of anywhere between three to 10 years or longer. This range is determined by the age of the individuals within the household. The 4th and last fund or portfolio is the Legacy or Wealth Transfer Fund.  Typically, this also includes the retiree’s primary and secondary residences.

Once these discussions have taken place and decisions have been made; then assets can be allocated according to their specific goal. This safety-first approach for retirement planning, moving prospectively will allow Americans to feel safe and secure in their retirement for which they have worked so hard during their lives.  They can enjoy themselves, their families, and their communities as they actively participate in a meaningful, enjoyable, and dignified retirement. This is truly what Cannon Financial Institute is committed to as we assist advisors to make this transition happen in their own communities and within the relationships, they are privileged to serve and advise.

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