How advisers can help pre-retirees

Recently, I heard the phrase “inattentive households” — a term clearly coined by economists for economists — at a conference from someone discussing pre-retirees’ lack of awareness of the typical income and spending changes that come with retirement.

The researchers hypothesized that because pre-retirees don’t always pay attention or anticipate the income changes that come with retirement, they don’t make immediate adjustments to their spending to align with their new income. As reality catches up, they eventually adjust and find their new spending balance.

This made me think — how much attention do people really pay to these topics as they approach retirement?

One thing we know for sure is that lot of workers are concerned about retirement. A recent T. Rowe Price survey found that more than two-thirds of workers do not expect to live as well or better in retirement than they did while working. Shouldn’t that mean they are paying more attention to the issues that will determine their retirement outcome?

Not necessarily.

A high level of concern doesn’t always translate into increased attention. The same survey asked pre-retirees (ages 50 and older) about their retirement portfolio preferences — that is, how they rate the trade-off between guaranteed income and liquidity — to understand what products or services might best suit their needs.

The data revealed that few pre-retirees can clearly express their retirement portfolio preferences, which means that majority of them don’t know enough about retirement income strategies or products to form an opinion. The lack of knowledge creates confusion, and people aren’t comfortable addressing the problem.

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Retirees are most concerned about their finances at the beginning of retirement because, for most, their financial lives depended on a regular paycheck. It takes time to adjust to going without one.

Also, new retirees don’t have a good handle on their spending because they are still trying to do the math on the lifestyle they can afford. Combine all this fear of the unknown with a lack of guidance, and we have a perfect recipe for stress.

But it’s not just those who are unprepared who are concerned about running out of money. Even people who are adequately prepared for retirement can feel stressed about their finances if they don’t receive proper advice.

The good news is, as people move through retirement, they adapt. As a result, financial concerns start to fade as people fine-tune their spending and feel more assured about their finances.

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Our survey also showed that priorities change the longer individuals are retired. In the first five years of their retirement, retirees are more concerned about converting their assets into income, saving for health care expenses and managing their day-to-day expenses.

However, those who have been retired more than 11 years worry less about their day-to-day finances and focus more on leaving a financial legacy.

While retirement concerns are on everyone’s mind, a variety of data suggest that financial anxiety about retirement peaks in the 10 to 15 years preceding retirement and remains high in the initial years of retirement. The road to retirement seems foggy to most.

But as people start living in retirement, the fog seems to lift. This is not surprising. Any big life event — like buying the first home, getting married or becoming a parent — comes with some anxiety. But as we get used to the new reality, the fear fades. Retirement is no different.

So what does all this mean for advisers?

People are likely to be more receptive to advice in the years leading up to and during the initial years of retirement. In this window, advisers can generate a lot of value for their clients.

But they should keep in mind that the end goal is not creating a retirement income strategy or an estate plan for their clients. While those things are important, the end goal is to provide clients with an emotional assurance that they are in safe hands.

If retirees feel comfortable about the decisions that they are making (or that are being made with them by advisers), they will be set up for a successful retirement. On the flip side, any poor advice received during this period can significantly worsen someone’s retirement outlook.

The timing of advice has to be coupled with the right kind of advice. Among workers age 50 and older, the top retirement concern is managing a plan to draw down the savings they have accrued over their working lifetimes. Funding health care expenses in retirement is a close second.

People might think these are separate problems, but they are not. In reality, large chunks of health care expenses can be budgeted and should be part of an overall income and drawdown strategy.

By bringing such insights to their clients, advisers can alleviate lot of the retirement fear and help them live a successful retirement.

Sudipto Banerjee is a senior manager of thought leadership at T. Rowe Price.

Related Topics: Retirement