As noted by Pacific Life's Reed Lloyd in a recent conversation with ThinkAdvisor, it is a basic fact of life in the U.S. today that traditional defined benefit pension plans are in decline.
1. Americans Are Moving Beyond the Image of ‘Retirement Nirvana’
In McClanahan's experience working with clients and speaking with industry colleagues, a growing number of workers are simply not focused on the goal of "retirement" in the traditional sense of the word. This is especially true of younger clients, she said, but it is also true with older generations.
"Life is precarious, as the COVID-19 pandemic experience has shown us all," said McClanahan (pictured above.) "Over the past few years, many people in our client base have come to the conclusion that it is important to balance the enjoyment of life today and the need to save for the future and to save for financial resilience and freedom. For us as advisors, this means we need to set aside the retirement-first discussions and put the spotlight on this concept of financial resilience."
McClanahan said this trend is already having an impact in her discussions with clients, including those at and near retirement.
"Many of them have shifted their thinking away from trying to create a huge nest egg for a day they may never see," she explained.
Even those clients who have generated a substantial nest egg often do not simply want to flip a switch and totally disengage from the workforce in one go. They may instead prefer to cut back on working hours or transition into another role or industry.
This shift in thinking means many clients are eager to reorient their planning discussions around lifestyle and income stability, and this fact demands that advisors do the same. An advisory approach that only speaks to the needs of accumulation will not be a cornerstone for success in this emerging environment, McClanahan and the panel agreed.
2. Social Security Know-How Is Improving
In comments echoed by the other panelists, Pfau (above) emphasized the critical role Social Security plays in many Americans' retirement income planning, and he pointed to some statistics that suggest Americans are growing more savvy regarding optimal claiming strategies.
"Historically, the SSA's data showed that close to 60% of people used to claim their benefit starting at age 62, but starting about a decade ago, that figure began to shrink," Pfau said. "As of 2021, fewer than 30% of people began drawing their Social Security checks at the minimum age. At the same time, the percentage of people who wait beyond full retirement age has been going up significantly, from about 5% in 2010 to now above 20%."
Pfau said better advice and education seems to be getting through to the public and having a positive impact on their claiming behaviors. Despite the improved behaviors, the panel said, advisors can and should continue to bring Social Security-oriented discussion and education to their clients — especially to those clients who may be eager, as McClanahan put it, to "get their hands on the money as quickly as possible."
"Even among people with plenty of money who would clearly be better served by waiting to claim, there is a tendency to feel that pressure of just starting the payments as soon as possible. It's an ingrained mindset," she said.
"When we show clients the numbers, we can usually talk them into doing the right thing, which is often waiting to claim. Taking the time to explain the numbers to people is critical, and so is engaging them in a more nuanced discussion — for example by bringing in spousal considerations. One thing that opens people's eyes is the fact that they may hurt their spouse significantly by claiming early, even if they feel their own personal longevity might not be that great."
3. The 4% Rule Is Still Dead
All of the panelists voiced a significant degree of skepticism about the 4% rule of thumb for retirement spending and encouraged their fellow industry professionals to push beyond such a simple framework designed to solve such a complex challenge.
Defined basically, this rule suggests a given client in retirement should add up all of their investments and simply plan to withdraw 4% of their total wealth during their first year of retirement, thereafter adjusting the dollar amount to be withdrawn to account for inflation.
" I am concerned about the 4% rule of thumb," Pfau said. "Very low inflation was the saving grace behind this rule for a long time, because the low inflation allowed for a higher sustainable spending rate. That is changing with substantially higher inflation, and especially if inflation remains high. It will be very difficult for people to actually follow this rule, because inflation can put a tremendous strain on a portfolio."
Hopkins agreed with that warning and said such simple rules of thumb cannot accurately reflect the way people live their lives. He also pointed out that the asset allocation assumptions used in the research that popularized the 4% withdrawal rule no longer reflect the typical investors' portfolio.
"Basically none of your clients today are going to be holding 50% in U.S. equities and 50% bonds, which is what the 4% research assumes," he explained. "Today your clients' holdings are likely to be more complex and spread across holdings in diversified mutual funds, ETFs, etc."
McClanahan pointed out that the 4% withdrawal rule can leave savers with fewer assets exposed to longevity risk, while at the same time, wealthier clients following the rule may actually be spending too defensively and missing out on the opportunity to enjoy their accumulated wealth.
"We have had clients come to us who are already retired, and they are very focused on this 4% rule," she said. "When we run the numbers, we can show them that in fact they can be spending significantly more. When we bring them into this spending-focused philosophy and give them permission to feel confidence about spend more in the early 'go-go' years of retirement, it is really a positive thing for them."
(Image: Adobe Stock)
