Journal of Financial Planning: February 2011
Jonathan Guyton, CFP®, is principal of Cornerstone Wealth Advisors Inc., a holistic financial planning and wealth management firm in Edina, Minnesota. He is a researcher, mentor, author, and frequent national speaker on retirement planning and asset distribution strategies, and a former winner of the Journal of Financial Planning’s Call for Papers competition.
Lately, I’ve found myself thinking about the powerful opportunities we have as financial planners for our specific advice—and the manner in which we deliver it—to have a significant behavioral influence on the quality of our clients’ lives.
Going beyond the left-brain analytics of traditional financial planning to facilitate such an outcome is no easy task. To do so requires us to meet clients at the place of their past experiences, viewpoints, values, and, yes, biases. To expect them to see things as we do is to create a gap between us into which even the best financial planning science can fall, unimplemented.
Among other things, this means we must be in tune with the key aspects of our client’s history and relationship with money. We must advocate for those future scenarios that will most honor their values and are least likely to trigger the fears and self-sabotaging behaviors that can violate them. Both style and substance matter.
Clients’ past experiences create the “stories” they tell themselves that in turn become the prisms through which present events are framed—often in highly unhealthy ways. And the rigidity of this framing can lead to more stories about the future that can have the potential to violate their most precious values, a sure recipe for an unhealthy situation at many levels.
Fortunately, occasional moments present themselves in nearly every advisory relationship when this all comes together and breakthroughs can occur … if we are alert and have the skills to see such moments for what they are. In the words of Thaler and Sunstein1, such moments are ripe for a “nudge.”
Scarcity
One of the most harmful of these “stories” involves the notion of scarcity. This can take many forms, but it frequently shows up as a (perceived) scarcity of financial resources or as a scarcity of time. A fear that there won’t be enough.
This most often occurs as a fear that life will either end too late or too soon. The former is a fear of outliving one’s money; the latter is a fear that the ability to live a worthwhile life will be cut short. And, as most of us know, the presence of both fears in a couple can be an insidious combination because each spouse feels justified in his or her fears and it sets up the poisonous proposition that one spouse’s concerns can only be addressed at the expense of the other’s. Of course, this is all in their framing, but this framing is their reality. Unless some movement can be sparked and their framing expanded, here they are likely to remain.
Stuck.
Just like Cass and Becky are. Our sample couple’s lives have transitioned to include more flexibility to travel and be with their grandchildren living around the country now that Cass has wound down his consulting business. Despite this new freedom, Becky is worried. “My grandmother had to sell her house after my grandfather died when her pension and Social Security got cut in half,” she remembers. “And my parents didn’t save enough; they’re well on their way to foolishly spending through their principal. I don’t want that to be us.”
Things look different to Cass. “My side of the family usually sees a significant health decline by their early 70s. If we don’t live for today while we can, opportunities will pass us by.” Is it any wonder that Becky’s family financial history colors her sense of long-term financial security and links it to “prudent” spending decisions in retirement, while Cass keeps wanting to tap their nest egg for extra distributions “while we still can”? Scarcity fears seem firmly entrenched.
What is our role as planners when we encounter views of life thus framed by scarcity? First of all, both spouses are right: Becky’s conviction that spending policies play a significant role in the long-term level of financial security is supported by financial planning theory, and Cass’s sense that the failure to pursue dreams is a sure formula for regret resonates as well. The fears at the foundation of these views fester and spill over into their relationship and quality of life. As planners, we might soon see ourselves as either an arbitrator in a dispute or the bad cop in a zero-sum game. Unless we can change the rules.
Appreciative Inquiry
Clearly both Becky and Cass deserve to be honored for their experiences and the life-views they have created, even if they cannot (yet) do so for each other. And this must happen before any alternative re-framing or solutions are offered. I might say to them, “You are both right. I completely understand why you feel the way you do. How could you not based on what you know? Cass fears the regret from not enough quality of life, and Becky fears the stress and consequences from too much quantity of life. That’s a tough one, and it happens with couples more often than you’d think. If only one of you had paid me off before the meeting, I could now take your side and tell your beloved they are wrong.” (Believe it or not, sometimes the humor of the absurd can illuminate the “stuck” tension just enough to create an opening for clients to break free from their self-sabotaging storytelling.)
However, far more important than anything we can say, couples need to talk to each other. Appreciative inquiry can be a powerful approach in such circumstances. We can ask them to reflect on their own life experiences to find an appreciation for the other’s framing. Perhaps Becky has felt the pang of regret over a missed opportunity. Maybe Cass has felt the gut-wrenching of having to choose between various necessities of life. If so, or at least if they can empathize with each other, the opportunity to honor their respective life-views via a reframed planning strategy now has the potential to also reach more deeply into their lives.
Core and Discretionary Portfolios
In this situation, we often rebrand clients’ overall investment portfolio into two distinct components, “core” and “discretionary” (or, as one of our clients delights in calling it, slush). Each component has its own purpose, policies, and underlying portfolio allocation. One of our retired clients has called this approach, “The best advice you’ve given us in our 10 years of working together.”
Along with any pension, Social Security, or other ongoing reliable income, the core portfolio’s purpose is to fund ongoing living expenses, including travel and entertainment, for the rest of the clients’ lives in an inflation-adjusted manner that is safe and sustainable. It has its own underlying withdrawal policies, ideally laid out in a withdrawal policy statement such as I wrote about in this Journal last June and spoke about at FPA’s annual conference last fall. These withdrawal/spending policies need to be specific and disciplined; past research has shown that such disciplined withdrawal policies are the ones with the bullet-proof probabilities of success. Taking additional distributions outside these policies can quickly put chinks in the armor of financial security and diminish a retirement plan’s security. Typically, the core portfolio consists of 85 percent to 95 percent of total investment assets, obviously depending on the after-tax cash flow it needs to fund. In a nutshell, this addresses Becky’s concerns.
The discretionary portfolio’s purpose supports Cass’s viewpoint. These funds are to be used both spontaneously and by design for expenditures beyond core needs for which the clients deem it worthwhile to tap these assets. That is the key: for which they deem it worthwhile. Moreover, it shifts the question, “Is it okay to take this extra one-time withdrawal?” from the planner (who can’t know because details about future “one-time” withdrawals are unknowable) to the client (who is empowered to make this choice based on priorities, timing, and values).
Now, with their core lifestyle securely funded by other resources, a freeing conversation can ensue as to how these resources might be deployed to enhance their quality of life. Dreams, values, and bucket lists can drive decisions rather than fear, guilt, or manipulation. Policies and plans for these assets can emerge. We are free to watch what clients do and to support their emerging choices without worry about what they might do next. The rules of the game have changed!
Strategically, the discretionary portfolio is ideally funded at least in part with non-qualified or Roth IRA assets, though this is not essential. It is important for clients to know that this fund should only be replenished with unused withdrawals from the core portfolio or unanticipated inflows of capital such as an inheritance. Asset allocation should be determined through conversations, with higher anticipated withdrawals in the next 3–5 years prescribing a higher portion of fixed-income holdings.
This solution hinges on turning an “either/or” scarcity-based confrontation into a collaborative “both/and” approach. Surely, the core/discretionary bifurcation could have been presented without the preceding dialogue I described, but then it might have only minimized the tension rather than shifted the dynamic to a new plane.
A Values Focus
Sometimes, however, a series of events produces material and behavioral changes in circumstances that can put a key aspect of even the most conscientiously designed plan at risk. Even in times like these, with skill, grace, and good fortune, that moment of transformation may also appear.
Take the case of Kerry and Lauren. Though 11 years apart in age, Kerry and Lauren met as single parents while regularly attending their sons’ athletic events. They fell in love, began creating a wonderful life together, eventually married, and bought a new home, financed with a 30-year mortgage. In 2005, with interest rates having fallen, they refinanced to a 15-year loan. At that time, they were 61 and 50.
One of Kerry’s primary values was to provide a mortgage-free home for himself and his beloved when they retired in about nine years. I knew how important this was to him from prior conversations that revealed how closely he linked such financial responsibilities with the care and support needed to foster healthy family relationships. His father had not done so, and that experience left its mark.
For her part, it mattered deeply to Lauren that Kerry be able to retire at an age that would still allow them to pursue their bucket-list items, including extended periods of travel. Accelerating payments to eliminate the mortgage in 10 years was congruent with their values. And their planning was in good shape to sustain their future mortgage-free lifestyle from that point on.
Back in 2005, making the $2,700 monthly payment necessary to accomplish this looked quite feasible. For the next few years, they stayed true to their plan. Then Lauren changed jobs to a more-satisfying but lower-paying position and Kerry’s income declined in the depressed housing market in which he worked. Cash flow was tight, and by early 2008 they could no longer make the extra mortgage payments; they needed both incomes to afford the $1,850 required payment of the 15-year loan that was now unlikely to be paid off until 2019 when Kerry would be 75. Life stress rose sharply as their new financial reality frayed the fabric of their core values.
Our response was to initiate a conversation with Kerry and Lauren about what really mattered to them in this unanticipated situation. Lauren shared that Kerry’s increased stress was worrying her and that her paramount concern was for the quality of their life together. Both agreed that they wanted to continue living in their house, even if it meant revising their plans to pay for it. Kerry stated that if he felt confident in their plan to pay the mortgage, he could see himself retiring before it was paid off.
With their values affirmed and now reframed in light of their circumstances, we proposed a seemingly unconventional strategy: lock in a modest ongoing cash flow requirement by refinancing the remaining $155,000 balance to a 30-year mortgage and continue to make aggressive prepayments as their incomes allowed. Their slightly lower interest rate paled in comparison to the pressure relieved by the nearly $1,100 reduction in their required payment. Kerry came to see that this $785 obligation would not over-burden their retirement years, and Lauren liked the potential for reduced financial stress and the honoring of their original retirement time frame.
From a left-brain perspective, this is not rocket science, and it’s a fair question why they didn’t refinance with a 15-year loan. The key, though, was the conversations in the six months between our initially addressing this situation and when Kerry embraced the new strategy. In fact, it was Kerry’s momentary hesitation at the $350 higher 15-year payment that tipped the scale in terms of which approach would most honor their values and accomplish their goals.
For me, this was a key reminder. It is often in the slight pause or the furrowed brow or the sigh of acknowledgement when the art and science of our craft come together to make the whole so much greater than the sum of its parts.
Cue the “nudge.”
Endnote
1. Thaler, Richard H. and Cass R. Sunstein. 2008. Nudge: Improving Decisions About Health, Wealth, and Happiness. New Haven: Yale University Press. The authors also have a blog at http://nudges.org.