This article is part of the Morningstar Retirement Week special report.
Advisors would be wise to embrace ‘wholistic’ retirement plans that go beyond investments, money and asset allocation, and into lifestyles, health, and overall happiness, attendees heard at the first Morningstar Executive Forum of 2020: ‘Navigating the New Retirement’.
A significant change in retirement age, and what retirement actually looks like today, needs new investment approaches, attendees heard. Retirement author Don Ezra and Morningstar Investment Management’s head of retirement research, David Blanchett were panellists with moderator Michael Keaveney, Head of Investment Management at Morningstar Investment Management.
The discussion began with the definition of a ‘classic’ retirement, which both panellists agreed had a negative connotation. “Earlier [life] had three stages, Learn, Earn and Burn,” Ezra said.
But life is much more nuanced now. If you know at birth that you will live to 100, will you leave home at 18, and follow what was the ‘usual’ path, including into retirement?” Ezra asked.
Blanchett agreed, adding that the meaning of retirement has evolved, and that now for advisors it really means ‘helping an investor do what they want to do when they stop working’.
A wider array of possibilities come with an important need for retirees today to ask themselves three key questions – and only, in the end, are you asked about money.
- Who am I?
- How do I fill my time?
- Will I outlive my money?
“Retirement is more than money,” Ezra added.
From a financial perspective, investing for retirement may be about supporting the answers to the first two questions. But how much you will need in retirement depends on several factors – and a major one is when you will retire.
The retirement number
Both panelists agreed that the age of retirement is headed higher, as people live longer, and healthier lives.
“I expect that people will work longer, part time, or full time, and that number will continue to go up,” Blanchett said, adding that his views are mixed on whether there is a ‘retirement crisis’.
Ezra agreed. “Retirees will always adjust. They make do with what they have. There is no crisis, because retirees will make it work. It would be nice if we didn't have to make do, but when it comes down to it, we make do,” he said.
Blanchett points out that the global trend is towards people working longer, and the age is pushing higher.
“My kids expect to work until 70, and it is not inconceivable that the next generation will work to 80,” Ezra quipped.
Longer lives, longer retirement
And as people work longer, they’re also forced to fend for themselves when it comes to retirement savings, and that is where there could be a crisis.
Blanchett points out that most retirees and pre-retirees do not believe there is a crisis right now, but as we move from a defined benefit to a defined contribution system, we could see a ‘mild’ retirement crisis.
“Defined contribution plans are working, and research shows that those who have defined contribution plans do better, but what about those that don’t? And even those that do save, are they saving enough?” Blanchett asks. He points to the fact that investors are essentially irrational, and policymakers should step in to save them from themselves, almost.
Blanchett says the SECURE Act in the U.S., that passed in December 2019, does most for retirement in recent times, but it still doesn’t go far enough.
Both panellists agreed that the way to increase savings is to make it mandatory, similar to Australia’s superannuation fund that mandates employer contributions at 9.5%, to increase to 12% by 2025.
And what after the savings come in? Where should retirees invest?
Equities and retirees
75-year old Ezra points to his own circumstances to highlight how rules of thumb no longer hold. “Going by the 100-age rule, I should be invested 25% in equities, and I have almost 3 times that in equities,” he said. He keeps 5-years’ worth of spending expenses in cash equivalent products, and the rest in equities. “When the markets don't perform, I amortize my spending,” he said adding that that as rates lower, he sees income being made up from dividends.
While this might work for someone in Ezra’s position, for many if not most investors, who are struggling to catch up to where they want to be in terms of a retirement portfolio, overexposure to equities could be dangerous, Blanchett warns.
Ezra agreed, adding that for most people, fixed income offers safety from volatility. “For me, personally, I don’t need protection from volatility,” he points out.
“People who try to ‘make up’ the shortfall in their retirement savings through equities could be in for a rude shock in case of market downturns,” Blanchett warns.
The reason people believe equities are these magic bullets in the short term is because of their unrealistic return expectations.
The problem with historical returns
Blanchett warns that advisors showing future returns based on historical returns is not fair. While all advisors will warn that past performance does not equal future returns, these simulations give investors an unrealistic idea of potential returns.
“Returns expectations have to be reasonable,” Blanchett insists.
He accepts that it is hard to show clients realistic pictures, and people want the best scenarios.
“It’s a knowledge mismatch, those with more knowledge pull the wool over the eyes of those that have less knowledge,” Ezra said.
It all comes down to advice. And that is where professionals have the opportunity to differentiate.
The value of advice
“The fact is that the investment side of things is commoditized. And most information, including portfolios, are online practically free. So advisors have to do more than just investments,” Blanchett says.
He also points out that the value of advice is that the highest point around retirees and soon-to-be retirees, as this is when irrevocable choices are made around retirement.
So what should advisors charge?
“Think about it, when you go to a lawyer or an accountant and ask how much they charge, do they reply ‘Well, how much you got?’ That’s unique to financial advisors, and we must move away from a pure basis point remuneration model,” Blanchett says, adding that some combination of hourly rates and a retainer would be the best solution.
Bonus: Self-evaluation for all
Ezra told attendees of the seven keys to 'Life's Abundance' in retirement - family, friends, work, play, physical health, mental health and money.
“Ask yourself, on a scale of 1-10, how do you feature for each? Go one at a time, and if you're happy with one score, move to the next. If the score is low for any one aspect, work on it,” he says, adding that this is a personal score, a self-evaluation tool that anyone can keep evaluating constantly to give you’re a gut-check on what’s important.
“Money is important until it fulfills what you want. And then it doesn't matter. Look at money as survival vs thriving. When you are in the mode of survival, money = happiness. When you reach the mode of thriving, you begin the comparison. At the point of comparison, it takes a lot of money to move the needle to higher amounts of happiness,” Ezra says.
