When I present a plan to a new retirement planning client, sometimes they resonate, and sometimes I get a blank stare in response. I can tell immediately if the pension plan is not suitable for the client. But why do strategies that resonate with some clients fail with others?
It’s not because these latter plans don’t work, it’s because they don’t match the client’s personality in retirement. If the client’s mindset about money doesn’t match the plan, it’s unlikely to resonate with them. The research of dr. Alejandro Murgu (opens in new tab)Ia and Wade Pfau showed that there are four main ways that people approaching or in retirement think about money.
1. Time segmentation approach
The “time segmentation” approach mentally places your money and assets into three buckets based on when you need to access them. The money you will need quick access to goes in short-term form. You would avoid investing this money in risky products because if the market goes down when you need to access those funds, you will lose money. Instead, you’d choose lower-risk assets like savings accounts, CDs, and money market accounts.
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Money you don’t need to access quickly goes into the long-term bucket. This money can be invested in riskier products because if the market crashes, you don’t have to withdraw from that bucket and can therefore wait for asset values to recover before turning it into cash. Having a long-term bucket gives you a chance to beat inflation with your investments.
The third, middle bucket is for income you’ll need within three to seven years. You would probably choose a medium risk strategy for the middle bucket. Too safe and you may not get enough returns, while investing in overly risky products exposes you to the possibility of losses that could lead to a shortfall in income.
People who favor a time segmentation approach tend to view retirement in terms of net results over time rather than on a more immediate basis.
2. Risk-Wrap approach
At the other end of the retirement personality spectrum is the “risk wrap” approach. Someone who favors this approach doesn’t want to think about moving money between buckets and doesn’t want to risk much with their nest egg. Instead, they want a retirement equivalent to a stable salary.
This type of retirement personality is likely to favor retirement funds with built-in downside protection. Structured notes, insurance products and deferred annuities that return modest gains during market rises but are insulated from market downturns are products they are likely to favor.
3. Access to protected income
This personality type is a mix of the first two, leaning towards a risk-taking approach. A “protected income” retiree wants to know that the income from their retirement savings will remain level throughout their retirement. They will tend to skip long-term, riskier investments in favor of greater predictability.
4. Total return approach
The “total return” type of person doesn’t need to know that they will be withdrawing the same amount from their accounts year after year. They aim for ultimate success in retirement and often adjust their income plans to increase the likelihood of that success. This person is more likely to be willing to invest in higher risk/reward assets during retirement.
Understanding the differences between personality types for retirement can help you and your financial advisor come up with a plan that fits your personality while still being a good strategy. If you’re nearing retirement and planning to meet with a financial advisor to discuss your retirement income strategy, it’s a good idea to consider which of these personality types best aligns with your values.
When you and your financial professional are aligned on your retirement strategy, it increases the likelihood of retirement success. A strategy that is poorly aligned with your retirement personality is one that you are more likely to have negative feelings about. This can cause you to make changes based on your emotions, and if you do so at inappropriate times, it can negatively affect your finances.
Retirement plans that fit your personality can also make retirement more enjoyable for non-financial reasons. If your retirement strategy makes you inherently nervous or anxious, even if it’s a healthy strategy, you’re likely to spend a lot of time nervous and anxious. It is not an optimal way to experience what should be a pleasant permanent vacation.
Work with your financial professional to understand how your personality affects your approach to retirement funding. It can yield better results, financial and otherwise.
This article was written by and represents the views of our advisor, not Kiplinger’s editorial team. You can check the advisor’s record with the SEC (opens in new tab) or with FINRA (opens in new tab).