When presenting a plan to a new retirement planning client, sometimes it resonates, and sometimes I get a blank look in response. I can tell right away if a retirement plan isn’t clicking with a client. But why do strategies that resonate with some clients fall flat with others?
It’s not because those latter plans don’t work, but rather, they don’t match the client’s retirement personality. If a client’s way of thinking about money doesn’t mesh with the plan, it’s unlikely to resonate with them. Research by Drs. Alejandro Murguia and Wade Pfau has shown there are four main ways people nearing or in retirement think about money.
1. Time-Segmentation Approach
The “time-segmentation” approach mentally places your money and assets into three buckets based on when you need to access them. Money you’ll need quick access to goes in a short-term bucket. You’d avoid investing this money in risky products because if the market is down when you need to access those funds, you’ll lose money. Instead, you’d choose lower-risk assets such as savings accounts, CDs and money market accounts.
Money you don’t need to access quickly goes in a long-term bucket. This money can be invested in riskier products because if the market crashes, you don’t need to withdraw from that bucket and can therefore wait for the asset values to recover before converting them to cash. Having a long-term bucket gives you a shot at beating inflation with your investments.
The third, intermediate bucket is for income you’ll need within three to seven years. You’d likely pick a medium-risk strategy for the intermediate bucket. Too safe, and you might not realize sufficient returns, while investing in overly risky products exposes you to the possibility of losses that could result in an income shortfall.
People who favor the time-segmentation approach tend to view retirement in terms of net results over time rather than on a more immediate basis.
2. Risk-Wrap Approach
At the other end of the retirement personality spectrum is the “risk-wrap” approach. Someone favoring this approach doesn’t want to think about moving money between buckets, and they don’t want to take many chances with their nest egg. Rather, they want the retirement equivalent of a steady paycheck.
This retirement personality type will likely favor retirement assets with downside protection built in. Structured notes, insurance products and deferred annuities that return modest gains during market upswings but are insulated from market downturns are products they’re likely to favor.
3. Protected-Income Approach
This personality type is a blend of the first two, leaning toward the risk-wrap approach. A “protected-income” retiree wants to know the income from their retirement savings will remain level throughout their retirement. They’ll tend to favor skipping longer-term, higher-risk investments in favor of more predictability.
4. Total-Return Approach
A “total-return” personality type doesn’t need to know that they’ll be withdrawing the same amount from their accounts year-over-year. They target ultimate retirement success and adjust their income plans frequently to keep the probability of that success high. This person is more likely to be willing to invest in higher-risk/reward assets during retirement.
Understanding the differences between retirement personality types can help you and your financial adviser arrive at a plan that resonates with your personality while still being a sound strategy. If you’re nearing retirement and are planning to meet with a financial adviser to discuss your retirement income strategy, it’s a good idea to consider which of these personality types best aligns with your values.
When you and your financial professional are in alignment regarding your retirement strategy, it increases the likelihood of retirement success. A strategy that is poorly matched with your retirement personality is one that you’re more likely to have negative feelings about. This can cause you to make changes based on your emotions, and doing so at inopportune times can have a negative impact on your finances.
Retirement plans matching your personality can also make retirement more enjoyable for non-financial reasons. If your retirement strategy makes you fundamentally nervous or upset, even if it’s a sound strategy, you will likely spend a lot of your time being nervous and upset. That’s not an optimal way to experience what should be an enjoyable permanent vacation.
Work with your financial professional to understand how your personality impacts your approach to retirement financing. Doing so can yield better results, financial and otherwise.
As Principal and Director of Financial Planning, Sam Gaeta helps clients identify financial goals and make plan recommendations using the five domains of financial planning -- Cash Flow, Investments, Insurance, Taxes and Estate Planning. He is responsible for prioritizing clients' financial objectives and effectively implementing their investment plans and actively monitors the ever-changing nature of clients' financial and investment plans.
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