The Top 5 Ways to Avoid Friction with Retirement Planning
Experienced advisors that are used to guiding the behavior of their high net worth clients have a larger impact on their clients’ success or failure in long-term retirement planning. Often, the question is simply how do you get your clients to save enough for retirement?
Both the wealthy and the low-income savers can be better off in retirement (for different reasons), but the concern for wealth managers and investment advisors lies in the average investor—the one who knows that they should be saving money but isn’t doing so.
This presents a befuddling situation for both the financial advisor and the investor, as many times the investors values aren’t lining up with their behaviors—they know they should be putting money away, but they don’t.
A recent survey found that 68% of respondents acknowledge that they are saving too little; 24% claim they plan to save in the next six months…but only 2% of those people did. This isn’t about people being lazy; it’s the little day-to-day frictions that cause this problem.
Things like broad-based programs (employers’ opt-out 401(k) programs, for example), the growth of target-date funds, and annuities that are designed to minimize risk in the long-term can help alleviate these frictions. Here’re three ways that you can advise your retirement planning clients properly:
Big Things Come In Small Packages. Tiny changes in habits can be huge for clients trying to save money. Things like adding the company’s logo to all 401k investment options given to employees can increase uptake of plans in multitudes.
Create Automatic Savings Programs. If your company makes investing as simple as possible for clients, even filling out the forms for them to sign can increase participation rates. Be cautious, however, to not do so much for them that they become disengaged with their personal savings process.
Utilize Target-Date Funds. These funds are becoming an increasingly important component of automating clients’ retirement planning.
The market dictates behavior in most cases, and people will typically buy more product when the cost drops…but what’s interesting is that the exact reverse psychology drives investor’s stock purchases. i.e. When stock prices drop, many investors flee the market. This behavioral pattern almost guarantees underperformance for the majority of US investors.
Don’t Forget Decumulation. As much as automating retirement savings is a proven strategy during the accumulation phase, once a client enters the decumulation phase, more automation is needed. This is where target-date funds and focused distribution strategies enter the picture.
Don’t Forget Social Security. You should factor Social Security Benefits into client’s plans. Social Security wealth still dominates in comparison to 401(k) wealth, and thus remains an incredibly important asset class. As long as the government continues to print money, Social Security will remain solvent for the short term.