So You've Helped Your Client Invest for Retirement. Now Comes the Hard Part.

The decumulation phase of retirement planning takes more work for advisors than the savings, or accumulation, phase, retirement experts have said, as it has more moving parts. Advisors not only draw down client portfolios they helped grow, but also must determine how other assets they might not have been privy to, such as homes, annuities, Roth IRAs, pensions, Social Security and other savings, fit into the decumulation formula.

In addition to setting up decumulation income flow with several access points for retirees, an advisor will need to sharpen their psychology chops, as there also are hurdles their clients will deal with as they move into this stage of life. One example that may not occur to clients: They may spend as much time decumulating assets as they spent accumulating them.

Therefore, the emotional aspect of retirement has to be considered, says Suzanne Shu, Ph.D., professor of marketing at Cornell University's Dyson School of Applied Economics and Management within the S.C. Johnson College of Business, who specializes in behavioral research. In 2018 she co-authored a paper, "The Psychology of Decumulation Decisions During Retirement," that broke down the various behavioral aspects before and during decumulation. Today she often speaks at retirement industry conferences.

"Retirement is something that people walk into with a lot of hope and positive feelings of 'I'm going to have all this free time for hobbies and seeing family.' But then there's also a lot of 'I'm giving up this part of my life that's been [much of my] identity: working.'"

This includes giving up friends and contacts seen on a daily basis as well as having something to "get up and do every day," Shu says. "There's a sort of loss associated with that process."

She adds that with decumulation, every situation is unique. "People can have very different goals, needs and constraints," she told ThinkAdvisor. "[Much] depends on things like: how long you think you're going to live, whether you want to leave money for your family, what you want to do in retirement, are you worried about health costs?

"There's all of these different individual constraints, meaning that there's no single piece of advice or no single path that we can give to people to help them figure it out," she says. "It is a much more complex decision-making environment."

Asking Tough Questions

Therefore, advisors need to understand their client's emotions as they near retirement. That means asking tough questions.

"I'm a big believer in the idea that [an advisor] needs to sit with the person and understand some of the emotion and the psychological biases that they're coming into it with," she says. "Is this someone who is really looking forward to retirement and getting out and doing a lot of things and wants a high amount of income or wealth to be able to pull it off, or is this someone who's a little bit more fearful and really [wants to] hold on to their nest egg for what they see as future needs?"

Also, is this someone who comes from a family that lives to 105 years old and needs to elongate their retirement needs, or someone who may have health issues? These are the kind of sensitive questions advisors need to ask, she notes.

Another behavioral factor advisors face is psychological ownership. That is, people work to have a 401(k) or even Social Security benefits and expect to take them as soon as they are eligible.

"Which is usually not a great financial decision," she says. "It's impatience, but it's also the feeling of 'this is mine. I earned it. I deserve it. I want to start getting my hands on it as fast as possible.'"

Annuity Question

Another issue is something Shu calls "fairness," and that plays a big part with annuities.

"From an economist perspective, annuities are wonderful because they give you guaranteed income for as long as you live," she explains. "But a lot of people see them as unfair because they think 'I'm going to give this money to an insurance company. And if I live a long time, that's great. But if I don't, the return on investment might not look as appealing."

What does she recommend advisors do to help their clients work through this type of thinking? Two options may help, she says. One is to walk through the reasons an annuity is like a pension plan, she says.

"If they think of an annuity is like their own personal pension that they've been contributing into for many years, it starts to feel a lot more palatable than if it's just they handed $100,000 to an insurance company," she says. "Just reframing [the idea] a little bit and getting people to think of it more like a pension than thinking of it as a financial product that you're hoping to get a return on investment for can change the mindset."

She also recommends "preconditioning" clients when they are younger, and earmarking a portion of retirement savings for an annuity.

"You do want to give people the option to back out if things have changed [by retirement], but laying the groundwork of a the plan, and [saying] 'this is how we're going to do this, and this money is earmarked to go into an annuity," I think helps."