5 tactics to improve client retirement readiness

Morningstar's Sarah Newcomb says ensure clients aren't overwhelmed by having to make too many decisions, and are realistic about spending and saving

May 15, 2019 @ 1:44 pm

By Ryan W. Neal

Five common things are preventing people from being ready to retire, according to Morningstar Inc. director of behavioral science, Sarah Newcomb.

Ms. Newcomb explained the key factors and research behind them at the InvestmentNews Retirement Income Summit in Chicago on Tuesday. She also provided financial advisers with specific tactics for combating each of them.

1. General busyness

Everyone has a lot going on in their life, and clients are no exception. So when advisers hear from clients, it's often during times of great stress, such as planning for a new child or handling the death of a loved one, Ms. Newcomb said.

The industry has made great strides in making saving for retirement easy with automation. Automatic savings, auto-enrollment and auto-escalation all help remove retirement decisions from life's daily calculations. But Ms. Newcomb recommended advisers go a step further with clients dealing with major life changes to ensure excess decision-making doesn't lead to "choice paralysis," where people with too many choices worry they'll make the wrong one so make no choice at all.

"Give people just a few very good things to choose between and let them choose the best, rather than give them a mountain of information, overwhelming them," Ms. Newcomb said.

2. Present bias

It's human nature to care more about immediate issues than something that feels far away, like retirement. By the time people get around to caring about retirement, it's already too late, so it's an adviser's job to get clients ahead of the curve. This is a harder task for some clients than others — and takes much more than gentle nudges.

To help them, Ms. Newcomb recommends using visualization strategies. Have clients think about what their life in retirement looks like. Force detail into the picture — for example, what their home will look like, or how they want to spend vacations — to make the far-away future feel closer.

3. Budget "exceptions"

Most people are pretty good at budgeting for regularly occurring expenses but are much worse when it comes to things like movie tickets, gifts or big purchases like fine art.

"We do not have a good sense of what our expenses actually are," Ms. Newcomb said. "We consider them exceptions, but they are not."

While past performance doesn't predict future market returns, past behavior is often the best predictive tool when it comes to human behavior, she said. With data tools such as account aggregation, advisers can factor in people's actual spending into future predictions and create more accurate retirement plans that account for how they spend their money.

4. Social pressures

Part of being human is comparing yourself to those around you, and this is amplified in the age of social media. But everyone compares themselves to people they think are doing better than they are — even people at the very top of the wealth scale. This is strongly correlated with higher stress, lower savings and reduced satisfaction with their financial life.

It's impossible to get people to stop comparing themselves to others, but a healthier comparison is possible. Ms. Newcomb recommended giving clients a financial role model — someone who is admired but not envied, lives a desired life that is achievable and shares some personal qualities.

"People who took three minutes to think of a financial role model and think about what it is they admire were significantly more confident they could reach their financial goals," Ms. Newcomb said.

5. Money messages

"This is a big one, and it's a messy one," Ms. Newcomb said. "Everything we do with money is based on a story we're telling ourselves."

These stories often arise from deeply held beliefs — such as the belief that good parents pay for their children's education — that become unquestionable truths in their mind. However, they can lead someone to make bad financial decisions.

Advisers can learn how to recognize these money messages and recognize when they are driving client decisions — and help clients change the narrative.

In the case of private education, this might take the form of explaining that someone is not a bad parent if they can't afford a child's dream education. Instead, they are better preparing children to handle the realities of adulthood.

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