How to fail at retirement

Failure occurs even among the best and the brightest

We recently read an academic article titled, “Why Clients Fail at Retirement,” that caused us to reflect again on the many dimensions of the client/advisor relationship.

The article, written by Evan Simonoff in Financial Advisor magazine, provided a list of the various reasons people struggle in retirement. Interestingly, these reasons often have little to do with the diligence and financial planning that goes into creating a prudent and diverse nest egg. In fact, the causes of failure in retirement often have little or no connection to one’s investments, but instead are derived from the fact that we, as human beings, are imperfect.

“Financial advisors can spend decades working with clients to craft a retirement plan that, on the surface, appears bulletproof from the standpoint of investments, retirement income and asset-liability management, only to see it fall apart in short order,” Simonoff writes. “Reality is that advisors don’t control financial markets, or clients’ savings and spending habits, much less the interpersonal dynamics of individuals’ lives. So all advisors can do is help make clients aware of the numerous pitfalls they face when their life faces the radical transformation to a post-work era.”

This is a hard and frequent fact of life for clients and their advisors, and like the proverbial mad uncle in the attic, it is usually a difficult issue to discuss. After all, no client wants to admit that the traits that led to a successful career could be the same traits that undermine their financial security in retirement. No advisor wants to tell a client they may be flunking retirement.

But, alas, failure occurs even among the best and the brightest. In fact, in many cases the best and the brightest are the most susceptible, because they believe themselves to be bulletproof from life changes and new financial constraints.

This is why we believe a good advisor should be a generalist and a humanist in both their outlook, as well as the way they communicate with their clients.

An understanding of human behavior and markets are both critical fundamentals that have defined our collective careers. If our main focus was on the mathematics of investment performance and not on history and psychology, we believe our team wouldn’t manage the wealth we do for the families we serve.

For the past five decades or so, the economics profession has been stripped of its human dimension by turning into a forum for advanced mathematics – despite the fact that people don’t live precisely according to any algorithm devised by a mathematical whiz kid.

There are many so-called “land mines” that undermine retirement security: Divorce, dependent adult children (aka “Kippers,” or Kids in Parents’ Pockets Eroding Retirement Savings), second homes, health care, and even elder fraud. And, of course, there are expensive hobbies such as a horse farm, an expensive sailboat, or an airplane that seem wonderful to have, but are really no more than expense-draining streams from what is typically a finite nest egg.

There is also the category we label “I’m smarter than everyone else,” and this hypothetical client decides to abandon retirement and use their nest egg to finance a start-up business.

Warren Buffett once said that “the chains of habit are too light to be felt until they are too heavy to be broken.” The bottom line in all these factors is that a client’s psychological wealth perspective may be at odds with their actual resources.

There is no easy way to talk about the fine line between retirement success and failure, but our clients should expect us to be candid with our advice and wise in our assessments. We are also proactive and encourage our clients to envision and experience the financial side of their future by planning and living within a budget a year or two prior to their actual retirement.

The primary objective is to help them modify their thinking about what they want from retirement, and how they can best achieve it.

It is important to remember that retirement is no day spa from reality. The same psychological factors that allow an individual to be successful in creating financial security during their working years can continue to provide the necessary and valuable tools for a fulfilling and successful retirement. 

Tom Sedoric, managing director-investments of The Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000 or thesedoricgroup.com.