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Financial planning has always required changes to established thinking and new approaches that challenge traditional assumptions as disruptors rise to shift the ground under clients’ feet – and today, nowhere is that ongoing evolution more potent and obvious than in retirement planning.
In the past several years, major changes in how consumers and financial advisors alike view the world have shaken long-held ideas about planning for a life in retirement. The Covid-19 pandemic, ongoing inflation, and the massive shifts they both ushered in for markets and how we live our daily lives changed our perception of how we interact with others and plan for our future. New legislation from the halls of Congress, such as the SECURE Act, has required professionals and clients to rethink what steps must be taken to avoid running out of money when needed most. And the constant march of progress with advances in financial services technology has presented longtime professionals with new challenges to their client relationships in an increasingly do-it-yourself culture.
As an educational institution on the front line of these landmark industry shifts, The American College of Financial Services and its thought leaders are recognizing the changes and rising to meet them.
“This anxiety about retirement planning has been a long time coming,” said Michael Finke, PhD, CFP®, Director of The College’s Wealth Management Certified Professional® (WMCP®) Program. “As employers have transitioned from pensions to defined contribution plans, individuals bear greater responsibility for turning savings into a lifestyle. We have a new generation of workers, many of whom have saved and invested automatically through target-date funds, who are seeking clarity about how these savings translate into income.”
As the responsibility for funding retirement has fallen more and more to individuals, this has increased the demand for professional advice.
“We now essentially dump a huge pile of money in our clients’ laps and say ‘good luck.’ We expect them to figure out what to do with that money and how to invest and spend it wisely on their own,” Finke said. “Our research shows that ‘understanding how much I can safely spend in retirement’ is by far the number one reason consumers would seek the services of a financial advisor – more than twice the percentage that sought advice to improve investment performance.”
Advisors in the field seem to be picking up on clients’ anxieties. In a survey of representatives from various RIA firms across the country conducted by The College, 71% of respondents said they wanted more retirement planning knowledge to meet the rising demand for these services. The data supports the need for a far more robust focus on retirement from firms and advisors, and one The College’s thought leaders are working to understand through a behavioral and financial lens.
Wade Pfau, PhD, CFA, RICP®, Professor of Practice in The College’s Retirement Income Certified Professional® (RICP®) Program and a field leader in retirement planning and theory, said the practical concerns of inflation, pandemic, legislation, and technology are just the tip of the iceberg – the real issues advisors need to address are psychological ones.
“Covid-19 was a reminder to all of us that life is fragile, and we need to make the most of today: that’s a message that really resonates with those closer to retirement, as well as making younger people think about their futures,” he said. “Our renewed focus on personal health has called into question this widely-held assumption of institutional living in old age: assisted living and nursing homes are no longer the safe places they used to be. Do aging individuals now want to try to stay in their homes as long as possible, which requires more strategic spending and saving? It’s an interesting conundrum.”
Pfau said the most prominent trend he has noticed is that those at or near retirement age are becoming more cautious than they used to be. Uncertainties like fluctuating interest rates, rising prices of goods due to inflation, and drops in bond and stock values have created a “triple whammy” of concerns that motivate people to lock their hard-earned and saved money down – sometimes at the expense of living better in retirement.
“Most financial planning software will tell you to assume a long-term inflation rate of two to three percent, but short-term inflation is much higher than that,” he said. “It’s not a fair comparison, but it makes people nervous about their money and can lead to inopportune decisions.”
Many experts agree that this seems to be the primary modern threat to retirement planning: not running out of money, but the missed opportunities that worry can cause. “Decumulation is much harder than accumulation,” Finke said. “Workers who are diligently saving in their IRA or 401(k) feel they’re working toward meeting a savings goal. But once most get there, they’re uncomfortable seeing the number get smaller to meet the spending goal that motivated the savings in the first place. Of course, you can’t take that money with you, but the fear of running out is so great that people aren’t living as well as they could. They essentially leave joy on the table because they fear losing their nest egg.”
Finke said his research has found most retirees are more comfortable spending guaranteed income such as pension plan money and Social Security, but less so money they have saved up themselves. Political instability, inflation, and general market insecurity top the list of anxieties for most of today’s high-net-worth earners – all concerns connect to how far people’s savings and preparation will go in retirement today. This, however, is where expertise in retirement planning can step in to fill the breach, especially from a personal perspective.
“The best gift an advisor can give a client trying to plan their retirement is the confidence to spend the money they saved – it’s why they saved it in the first place,” Finke said. “Clients need good advice, but even more, they need a comforting voice they trust telling them it will be okay. By specializing in retirement planning, advisors will have an advantage in building those kinds of relationships moving forward and fostering more trust with their clients through that greater level of clarity.”
Under Pfau and Finke’s leadership, The College’s RICP® and WMCP® Programs have developed complementary approaches to the disruptions of modern retirement planning. In WMCP®, students learn the various methods helpful to asset accumulation in preparation for retirement, including ideal investment vehicles and ways to build portfolios that stand the test of time. Then, in RICP®, they learn how to take those assets and efficiently draw them down over time, and gain unique knowledge on long-term care issues, tax considerations, and more. But The College is not just using facts and figures to influence its approach to change how professionals and clients view their retirement planning: it’s also a question of philosophy.
“Historically, account-based strategies have been the most popular in retirement planning: allocate money into stocks and bonds, and then gradually withdraw a certain amount every year at an agreed upon percentage like the ‘4% Rule,’” Finke said. “These days, it’s not all that clear those old rules are still effective, so we like to promote a goal-based planning strategy: start with learning more about your client’s goals and then develop a strategy that works for them and meets those goals. Planning shouldn’t be blind to the reality of how clients want to live, and working through this process with their advisor gives them a better understanding of whether the market will impact a client’s desired lifestyle.”
In the RICP® Program, Pfau has supplemented new and familiar concepts in retirement planning with his research on the idea of retirement income styles. “There’s a growing recognition that any strategy can be viable, but only for the right client,” he said. “Are they comfortable spending from a broadly-diversified investment portfolio? Would they rather use a ‘bucketing’ technique to invest differently for short-term versus long-term growth? Or do they want to build a protective floor first and then build on top of that to protect their essential needs against discretionary spending? It all depends on the client, and advisors must customize their advice for each client. We can’t afford to be stuck in a one-size-fits-all mentality anymore.”
Thought leaders like Pfau and Finke are also constantly updating The College’s programming to coincide with the latest regulatory and logistical changes – and 2022 has been an eventful year. From the myriad changes of the SECURE Act and its recent 2.0 incarnation to elemental retirement planning to the elimination of the stretch IRA and new limitations of withdrawal time horizons for required minimum distributions (RMDs), faculty have been kept busy speaking with industry leaders and conducting research on what the shifts in the planning landscape mean for students, advisors, and the general public. They are already planning to make curriculum changes in response to the passage of the updated SECURE Act 2.0 in 2023.
One change Pfau sees is the need for a more consistent focus on tax planning in retirement income education. “Sequence of returns risk has become a front and center concern. It’s not an abstract concept anymore,” he said. “When the SECURE Act changed the game for IRAs and limited the lifetime stretch withdrawal to a 10-year period, a lot more people became potential candidates for tax jeopardy and losing much of their hard-earned savings without proper planning steps to limit tax deductibility. Now, we’re seeing people in their peak earning years who may be in higher tax brackets needing to consider Roth conversions and other measures much earlier than before if they want to pay taxes at the lowest possible level.”
Pfau said clients with trust holdings with RMDs should revisit their estate planning documents frequently to ensure the trusts are still working as intended. He also noted buffer assets – not part of an investment portfolio such as a bank savings account, cash value whole life insurance policy, or a reverse mortgage that can provide temporary but fully liquid income at times of market upheaval – are growing in importance to consumers. Advisors, he said, should also be talking about these assets if they want to fully future-proof their clients’ retirement planning.
For Finke, one of the biggest disruptions the past few years have brought to traditional retirement planning has been the advent of technology as part of the process – but it’s not all robo-advisors and retirement planning automation. “In our surveys, we’ve asked people how comfortable they are seeing financial advisors via Zoom or other remote conferencing methods,” he said. “It’s become quite popular since the onset of the Covid pandemic, and many advisors have adjusted to this new reality of communication. We find while most clients want to meet with a new advisor in person for the first time, most people are okay with virtual meetings after that and, in fact, prefer it. When you’re using Zoom to meet with your advisor, you don’t have to take the time and inconvenience to travel to see them at their offices, and in some ways, it makes those relationships even easier to maintain.”
However, Finke cautions that advisors cannot become complacent in today’s world with the myriad options that are available to clients to do their retirement planning themselves. “While it may not always be advisable, it’s relatively easy for consumers to go it alone if they want to,” he said. “We as advisors need to show them that we can communicate with them on a different level to prove our value – to find out what they want to achieve, quell their fears, and help them succeed. Technology is here to support advisors, not compete with them. Still, even people who understand they shouldn’t worry about their portfolio returns constantly sometimes need the voice of another human to tell them not to. That’s something technology can’t do for us.”
In looking ahead to the next potential retirement planning disruption, many industry leaders have pointed to legislation or regulatory surprises, from tax reform to needed changes to the Social Security program. Things are never certain in retirement planning, Pfau said, and it is wise to keep an eye open for things that could cause the next shakeup. However, he said he is more optimistic about the future of retirement these days, especially as advisors look to focus more on people-centric relationships rather than purely transactional interactions.
“The situation is getting better. The Inflation Reduction Act has done a lot to lower prescription drug costs and take the financial burden off retirees in other ways,” he said. “The behavioral finance knowledge we preach here at The College also shows tomorrow’s advisors that clients may want different kinds of relationships with them. Some people want to delegate and have a knowledgeable advisor decide for them. Others want their advisor to be a partner in their planning and be more involved and educated about what’s going on. Still, others are what I might call ‘validators’: they’re not ready for a full-service relationship with an advisor, but they want help with a specific planning or money management situation that’s important to them. Advisors need to have different models and approaches based on the different kinds of relationships clients may be looking for.”
In addition to the Inflation Reduction Act, Congress passed the highly-anticipated SECURE 2.0 Act in December, which Pfau and Finke pointed to as another critical piece of industry-shaping legislation. The act continues the government’s reshaping of retirement planning that started with the SECURE Act of 2019 and stands to further the disruption of retirement as many know it.
Among other key provisions, the two SECURE acts increased the age at which consumers are required to take RMDs from their retirement accounts, in part an acknowledgment of the longer lifespan of the average American and also to account for worries about taxation on saved dollars. With RMDs pushed back, many clients will have more time to work with their financial advisor on optimal retirement strategies and may be in a lower tax bracket, meaning they can keep more of their hard-earned savings; however, this also means a renewed focus on tax planning within the retirement planning space advisors would be well-served to prepare for.
Many headlines have focused on the act’s mandatory and automatic enrollment for most employees in their company’s 401(k) or similar retirement plans. By making enrollment in these plans automatic, Finke said his concerns about the government or businesses putting the onus of retirement planning on individuals could be at least partially alleviated, and more employees – especially those working in lower-wage jobs – could be empowered to begin building up assets for their future financial security. It also means a greater opportunity for financial professionals focusing on retirement planning to access a growing demand pool for their services.
Along with these changes, the act also loosens penalties on emergency withdrawals from retirement plans, which have typically come with a heavy tax burden. While it is rarely optimal to take money out of a retirement account early, sometimes the situation requires it. The additional leeway will likely give consumers greater peace of mind in their conversations with financial professionals.
With much of the Washington focus of late on the details of student loan debt, another portion of the legislation allows for employer matching of student loan repayments. With the price of higher education increasing, many young Americans are saddled with crushing debt that hangs over their heads for decades. Experts say offering incentives to employees regarding paying off student debt could also open the door for those same employees to invest more heavily in their retirement plans – another source of increased security and demand for financial advice. All these and more changes will be incorporated into the College’s curriculum, including WMCP®, RICP®, and the Ed Slott and Company’s IRA Success program.
As an authority in the financial services field for nearly 100 years, The College has always prided itself on changing with the times, adapting to new situations and realities like these in the industry, and updating the education it offers to keep up with the latest facts on the ground. It is what faculty members like Finke say sets The College and its programs apart.
“We don’t just teach content: we teach application,” he said. “Having the knowledge of how to build a portfolio or how to plan retirement is just the first step, and this is something up-and-coming advisors are recognizing more and more. Knowing how to talk to clients about these issues and challenges is the key to forming relationships that last into and through your clients’ retirement years.”
Read this story and more in our 2022 President’s Report.