Tuesday, June 6, 2017

What Makes Us Happy

I recently watched a brief video interview with Michael Finke entitled, "Risk Tolerance in Retirement Planning." It's a great return on a two-minute investment of your time.

Finke is the Chief Academic Officer at The American College of Financial Services and one of the retirement researchers I most respect.

Although his interview primarily addresses risk tolerance, the line that caught my ear was this one, addressed to retirement planners:
"Your goal is to make [clients] as happy as they can be in retirement and it may make them happier to have less anxiety about their investment portfolio."
The issue this addresses for me is how we, as planners, researchers or bloggers, view our goals. I think it also applies to how do-it-yourselfers view their own goals in developing a retirement plan. As Finke so succinctly states it, the goal is a happy retiree.

Those of us on the plan-development side sometimes think our job is to create the retirement plan that we think is best for the client. "Best" may mean to us the plan that survives the most simulations, the plan that eliminates worst-case scenarios, or the plan that uses retirement resources most efficiently, for example. Those are all pretty good standards, but they don't measure happiness.

Claiming Social Security benefits, buying fixed annuities, setting a portfolio spending rate and investing retirement savings are common retirement decisions that can play economic theory against client happiness.

Retirees who delay claiming Social Security benefits will receive greater lifetime benefit payments if they live a long time but lesser benefits if they don't survive long after claiming. Retirees who claim early will receive greater lifetime benefits if they don't live a long life but lower benefits if they grow quite old. In other words, to delay the claiming of these benefits is effectively to purchase longevity insurance and at an attractive price.

Most economists (and I) generally recommend delaying but most retirees don't for many reasons. The primary reason is probably that most retirees need the income right away and can't afford to delay. But, some think their Social Security benefits will be taken away so they should grab them while they can (I don't). Some are convinced in the absence of any supporting evidence that they simply won't live a long time. Still others who aren't as dependent on the income believe they should claim benefits early and invest them in the stock market. A wealthy retiree or one with a substantial pension might not need more longevity insurance. It is possible that delaying Social Security claims might not make these clients happier than claiming at an early age would.

If I recommend to a client that she delay claiming her Social Security benefits and she lies awake at night worried that the Social Security program will be shut down before she receives any benefits then I have not created a happy client. Though I will do my best to explain the advantages of delaying, if delaying is going to make her unhappy then claiming early is the "best" strategy if we agree with Finke.

If a large equity allocation or an annuity will keep you awake at night, don't let me talk you into one.
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Similarly, I have spoken with clients and readers who can't imagine handing over their life savings to an insurance company to purchase a fixed annuity. Readers have also told me that they would never consider investing their very dear retirement savings. Purchasing a fixed annuity might be a no-brainer for an economist or financial planner but if it doesn't make the client happy it isn't the right strategy.

If a large equity allocation or owning a fixed annuity will keep you awake at night, don't let me talk you into one.

Finke's video isn't only about happy clients, of course. It's primarily about risk tolerance. It's a brief video that I could summarize here, but I'll ask you to watch it, instead, because I'm reminded of a conversation I had with a retirement planner/author some time back. I told him that I had loaned my copy of his recent book to a friend.

"That's wonderful!" he replied. "But, next time how about being a sport and buying her a copy?"

Finke's video can be seen at Risk Tolerance in Retirement Planning.


  1. I took an interest in this piece and its comments thread. I was particularly struck by the experience of the IFA (Independent Financial Adviser) with his clients who had been unused to dealing with large lump sums of money, and the difficulties caused by grief at a death. I dare say these lessons carry over into retirement planning too.


    1. I think there is a much broader set of possible retiree goals than most people realize. I had never considered, for example, an objective of getting help handling large sums of money. This could be restated as a risk, but either way I think it goes into a mission statement.

  2. Dirk, so much to think about. I could say that the adviser's goal, to the best of his/her ability, could be to make the client aware of all the relevant options, risks, rewards etc. then let the client make an informed decision that makes them happy. Of course this is limited to the adviser's knowledge, background, value system, biases etc. On the other hand I could say that the client making an informed decision is limited by his/her ability to understand the information the adviser presented as well as their own emotions which may not be static today and tomorrow. So it seems to me there are so many unknowns and moving parts in the whole process that making a definitive decision even about one's happiness with retirement decision is tricky. At best it seems to me that like retirement planning in general the plan needs to be revisited at least annually to make sure it still satisfies ones happiness goals. Just like dynamically updating ones retirement plan periodically. Brad

  3. All very true. My suggestion is this. A client should identify what they want from retirement. Then, a good adviser should coach the client and bring up issues that the retiree didn't consider and might want to add.

    But I think it begins with the client's goals, not the adviser's.

    Thanks for writing, Brad!