How the Mid-Market Makes Retirement Decisions

Journal of Financial Planning: December 2013


Betty Meredith, CFP®, CFA, CRC®, is the director of education and research at InFRE, where she oversees the incorporation of research findings and best practices into InFRE’s certification study and professional continuing education programs.

As financial planners, we know that when people arrive at retirement age without enough financial assets accumulated for retirement, things can still be done to increase their retirement security, even if the decision to retire has already been made, either by them or for them.

Earlier this year, I observed two of eight focus groups. Two groups were conducted in each of four cities across the country, including Baltimore, Maryland; Chattanooga, Tennessee; Chicago, Illinois; and Phoenix, Arizona. They were comprised of mid-market retirees ages 63 to 75, grouped by number of years in retirement (five or less, or more than five), level of retirement assets (under $150,000, and up to $400,000), and gender. Acceptable focus group participants were those who retired voluntarily and who were considered at high risk for running out of money in retirement—those required to make tradeoff decisions. The goal was to learn how retirees made the decision to retire and how they manage assets during retirement. The resulting research report, The Decision to Retire and Post-Retirement Financial Strategies, was sponsored by the Society of Actuaries and produced by Matt Greenwald of Mathew Greenwald & Associates.

The Retirement Decision-Making Process

In a nutshell, most of the study’s participants didn’t follow a decision-making process for several reasons: the uncertainty implicit in planning what life might bring, the difficulty planning for an unknown length of time, and that it’s just not how they are wired. How can we use these insights to make a difference in how we serve the mid-market?

What follows is a suggested series of questions to use when a client or family member approaches you with the news that they are about to retire, and you know they are not retirement ready. The questions are in preferred order; Social Security claiming and asset management questions should come later in the decision-making process. Following each question is what the focus groups’ participants were thinking and have done at each decision-point. This should provide you insight into why and how mid-market clients might make the choices they do.

1. How did you run the numbers/make an informed decision about if you can afford to retire?

“I didn’t ask anybody’s opinion. I just told my husband that’s what I was going to do.”

Most had not done a formal retirement plan, nor used worksheets, calculators, or sought the advice of a spouse or a retirement professional to make their retirement decision. Some discussed it with their spouse or co-workers, but many reported telling their spouse they had decided to retire.

Of those who worked with a financial adviser, most did not ask the adviser if they could afford to retire. Advisers who offered an opinion did not provide a written plan to help validate their recommendation.

These retirees also did not choose retirement to pursue their dreams, a hobby, or start a business. They decided to retire due to health of self or spouse, changes in the workplace, and the need to provide caregiving for loved ones. In many cases, when probed further, their “voluntary” retirement could be considered involuntary. Many had been retired for five to 10 years, so the Great Recession was not a factor in their retirement decision.

2. How do you know how well your essential expenses will be covered by Social Security and other lifetime income sources?

“You just know. You list your expenses and you list your income and you see what’s there. Then you hope to God that whatever the money you’ve invested is going to take you when inflation moves in and it’s no longer covered.”

In most cases, retirees made their decision to retire based on Social Security, pension, and work income from self or spouse to cover their monthly bills.

They manage their cash by focusing on expected cash flow in the current year and are very aware of their regular income and expenses. They don’t think long-term. They don’t withdraw from their retirement savings to pay for short-term discretionary spending like vacations or other luxury items; instead they reduce the amount they travel and spend. They are very adaptable when making spending decisions and reduce spending when needed. Some maintain a slush fund to give themselves permission to spend on discretionary items.

3. How long do you think you might live?

“I looked at all my relatives. I just wrote down their ages when they passed away. I came up with an average. Okay, what’s my general health? That’s how I figured it.”

Overall, family history was considered to be a good indicator of personal life expectancy. However, when participants were asked how those whose parents died younger should do things differently than those whose parents died older, the overwhelming response was that it makes no difference. Anything can happen; it’s difficult to plan for it; so it’s better to wait and see.

4. What are your greatest retirement risks/what are you most concerned about going wrong?

“My major financial concern is that the money will last long enough.”

In general, the retirees concluded that planning for their situation is not effective. They do not plan for shocks and long-term retirement risks. What they can control is to make adjustments when the unexpected arises, including increasing health expenses.

They self-insure by doing what they can to preserve their assets, limit debt, and control spending. They place little emphasis on risk management products and many are not well prepared to weather a substantial shock.

They generally do not consider inflation in their spending projections; they only look out a year at a time. They have gaps in knowledge about longevity and other retirement risks.

5. How might delaying Social Security improve your retirement security?

“My best friend kept saying, ‘Don’t do it. Don’t do it. Don’t do it.’ I regretted [taking Social Security] afterwards, but that is quite a bit of money that I could have still had. I had two close friends pass away before they were 60, and I said who knows? I might not be around either.”

Claiming Social Security early (a bird in the hand) is used as a risk management tool. Most claimed at age 62 after they performed a simplified analysis determining how long they must live to break even with if they claimed later. This approach obviously ignores longevity and inflation risks for themselves and/or their spouses.

What changes are you planning to make to your retirement assets to manage risk and produce lifetime income, such as purchase a longevity annuity or access home equity?

“I spent more time working the money when I was still working, and since I’ve retired it has sat in its place where it should be and I don’t work with it as much.”

Most own their homes and have paid off their mortgages. Overall, they are careful about debt. Most are strongly averse to using their home equity.

Their investing goal is to preserve their assets at the level they were when they retired. Maintaining asset value with inflation is not as important to them. Most do not have a plan for taking systematic withdrawals from their retirement savings. At age 70½, they take their Required Minimum Distributions.

One other finding that extended across length of time retired, asset levels, and geographic locations was the significant differences in experiences, feelings, concerns, and perceptions by gender. In the focus groups I observed in Chicago, men were more optimistic and more likely to think they could handle any financial situation that arose, even to the point of being over-confident or unrealistic, because intuitively they know they’re at risk and are maybe putting on their game face. Women were concerned about caregiving obligations, family relationships, and vulnerability to running out of assets, long-term care, and being a burden to their children.

Facilitate Informed Decision-Making

Easy-to-use, accessible decision tools and/or advice were not available to these focus group participants, so they winged it. A somewhat common thread was that it wasn’t worthwhile to consider the unpredictable, because they can’t do anything about it anyway; “It is better just to live one’s life.”

Even if do-it-yourself tools were readily available, it is likely most wouldn’t have used them on their own because more than 80 percent of the population have do-it-with-me and do-it-for-me financial styles, and because of the real danger of garbage in and garbage out when the inexperienced attempt to evaluate and make complex retirement tradeoff decisions.

The mid-market will need a professional with software to help them navigate matching lifetime income to their expenses, use of longevity annuities, identifying how health-related costs will be funded, when to claim Social Security, and use of home equity to lengthen the duration of their retirement assets.

In October, at FPA Experience 2013 in Orlando, Florida, John Salter, Ph.D., CFP®, AIFA®, and I presented an education session called, “The Stage is Set: Serving the Needs of the Mid-Market.” More than 60 people gathered after the presentation to share their passion for working with this market. If you’re interested in joining like-minded professionals in a dialogue to figure out how to appropriately, productively, and profitably help the mid-market make informed retirement decisions, reach out to me on FPA Connect and on LinkedIn. We hope to set up a community that will focus on this objective in the near future.

General Financial Planning Principles
Retirement Savings and Income Planning