Solving for the Human Elements at Retirement


          A famous motivational poster reads out “Success is a Journey, Not a Destination.” The poster speaks to success as a series of interactions and events that come to shape individuals and are shaped by individuals.

          In the world of retirement planning, financial planners have started to drift away from this journey and into the realm of destinations based planning techniques. For many retirement planners, retirement is about reaching a magic number that a client needs to accumulate before retirement, often funded by an employer and employee retirement contributions. These sources create a steady retirement income stream at retirement through a team of dedicated financial professionals working together with the client. Although this approach works in principle and may allow a retiree to maximize their total withdrawal amounts, I contend that retirement is less about withdrawal maximization and more about living with simplicity, dignity, and relative certainty of income as opposed to the maximization of withdrawals over a lifetime.

          Looking through the models of mass retirement planning services and advice available for employees of large companies today, I believe that the current financial services and strategies offered today poorly serves middle to lower income retirees. This failure is a result of the difficulty of following advice as retirees faculties change, their assets decrease over time, and their ability to access advice become constrained by the assets available to pay for advice.

          I contend that the major stumbling block to advisor lead retirement planning may be continued access to good financial advice and stewardship of assets as a constant requirement to strategy utilization. Furthermore, a retiree may go through many financial advisors throughout their lifetime which may impact the ability of the retiree to form a meaningful and lasting relationship; the relationship is essential in allowing an advisor to play the role of a counselor when current investment based retirement strategies go through market corrections.

          Personal retirement planning for working Americans is so vital now that there has been a large shift away from pension plans towards defined contribution style plans. This leads me to believe that the implications to society are of great and increasing magnitude. I believe that financial firms need to re-think their retirement investment advice strategies so that they can create the next “robo”-advisor experience. This new retirement strategy should keep in mind that retirees deserve dignity, their families deserve peace of mind, and financial firms must put together solutions that address the realities of the changing client-advisor relationship landscape.

          Ideally, this “robo”-retirement platform will accurately reflect a retiree’s assets in clearly understood section, empower life choices between leaving a legacy and drawing income, and allow for professional advisor advice as needed as opposed to having constant professional advice as a requirement.

          In this white paper, I intend to challenge current retirement philosophy and demonstrate a more humane approach to retirement planning that goes beyond withdrawal strategies. I intend to demonstrate a strategy that allows a person to make key decisions throughout accumulation to guarantee their retirement income mix at retirement as well as the option for legacy preservation. At retirement, the retiree will trade in their retirement assets for a retirement income while deciding what legacy they wish to preserve.

          This relatively simple way of thinking about retirement will not require a team of advisors, tax professionals, and legal professionals as envisioned by current withdrawal methods of today. At the same time, the “robo”-retiring strategy is not meant to be a strategy that could yield the highest total dollar amount at retirement; in fact, this strategy might not allow a retiree to feel that they have “won” the investment system or that they are a professional investor. Rather, this strategy stresses that the retiree should focus on retiring on a fixed income and manage their retirement mainly with an effort on budgeting and lifestyle management as opposed to portfolio management. I imagine a world that advisors act as stewards of the public’s personal finances, acting as guides that help think through the humanity behind every financial decision rather than market projections of the future.

Table of Contents

  1.             Accumulation of Assets
  2.            Creation of an Income Stream
  3.           Reality of Retirement
  4.           “Robo”-Retiring Professionally
  5.           Conclusion

Accumulation of Assets

          To help the majority of pre-retirees with their retirement planning needs, a retirement plan must first examine the scope of assets available for the average American. Because retirement planning is a very personal thing, it is important to consider what tools a person can use to stockpile income for retirement. Let’s start with the various things that make up the average retiree’s portfolio and their potential uses at retirement.

          The first item that a retiree has comes in the form of their Social Security income payments. This amount usually gives the retiree the greatest long-term protection against poverty at old age. Factors such as the total amount of working years, the age of claiming, as well as income levels before retirement determines how much of a role social security plays in each retiree’s life.

           The second asset that could provide retirement income is the person’s home. This personal use asset has a variety of retirement planning uses during their retirement years. A retiree can choose to live in a paid off home and pocket the mortgage or rental expenses from their everyday fixed costs, or take out a reverse mortgage to draw down the equity. Last, they can sell the home and pocket the cash to use during their retirement years. These strategies could impact a retirees lifestyle dramatically or have minimal effect. Regardless, this asset’s illiquidity could cause stress in the retiree’s ability to immediately liquidate and draw down assets.

          The third asset a person has towards retirement can come from the income they have set aside in retirement accounts, non-qualified brokerage accounts, annuities, savings accounts, and employer-sponsored retirement plans, to name a few. These non personal use assets range from conservative to aggressive. The trade-offs between liquidity, risk, and return often require professional management and continuous guidance. Because of the way advisors are compensated through the sales or management of these investment assets, many retirement advisors focus in on this area when planning for retirement.

          So how much of an impact does each of these different assets matter at retirement?

          Based on the 2008 U.S. Census Bureau, the most important accumulated asset a person may have is their ability to draw on Social Security over the course of their retirement, followed by the equity in their home, followed by the withdrawal of non-home assets. Although this trend may change in the future, the facts that are known today equal about half of all married couples and seventy percent of single income households rely on Social Security for their retirement income needs.1

          The chart above speaks to the power of Social Security as one of the largest accumulated benefits a person can look forward to at retirement. This picture points to the importance of Social Security claiming decisions at retirement as well as the importance of maximizing your benefit since this income can make a significant contribution towards total retirement assets when measured as total withdrawals throughout retirement.

          When thinking through retirement planning over the course of the next few years, a potential future trend may be a lower percentage of home equity than in liquid assets. As shown in the following chart, illustrating homeownership among those under 35 as much lower than their peer groups.

          Although there are plenty of personal life style reasons why an individual may put off home ownership until later years, those who are age 24-34 have lower rates of homeownership than their peers in the previous years for a variety of financial reasons.3 Because home equity builds up over time, a retiree with home ownership goals will need to dedicate more of their income leading up to retirement to pay off their mortgage to access the full benefit at retirement. Failure to do this may lead to lower equity built into homes and mortgage payments closer to or during retirement. If this trend persists, a retiree may need to focus more of their efforts on non-home assets to generate a larger percentage of their retirement income stream.

          The good news is that non-home assets savings have increased among the younger age groups. One study by Nerd Wallet comparing Millennials with Gen X has found that Millennial parents are saving 2% more as an aggregate compared to their Gen X counterparts and a whopping 5% more than their Baby Boomer counterparts.1

          As shown in the graph above from the same report, this trend projects out the assets accumulated based on the different savings rates of each generation across starting incomes. The differences in assets accumulated for retirement are significant and can lead to a seismic shift in how retirement income can be created to offset the loss of home equity.

          One shift will be that retirees will become reliant on their human capital for longer periods as they pay down their mortgages. As retirees dedicate these amounts over time, they may need to protect their income generation capabilities using insurance, so that home equity remains an asset rather than a liability for widowed spouses at retirement. Also, because more assets are not tied to a home, there is a greater need for income security generation with non personal use assets to potentially pay mortgages during retirement.

          To preserve assets and make good decisions about their legacy and income needs, a retiree may want to think of their accumulations and decumulations as a continuous path rather than two separate events. The following graph illustrates this representing the ability to generate income as Human Capital. The resource is something that decreases as you get closer towards retirement. This decrease is hopefully replaced by your growing financial assets to use for retirement and leave behind a legacy.

          The challenge to retirement planning lies in the fact that you may not be able to know the exact income you will make over the course of your life or how much you will need to decumulate your assets for at retirement.

When thinking about this graph, it is important to note that one does have control over the duration of work, allocation of assets for retirement, as well as the ability control spending needs. These are often what most retirement strategists will factor in for their clients to create a retirement income system. Any major correction in the market may require their clients to shift these expectations because of a loss of financial assets for retirement above the income needs of their client.

Creation of an Income Stream

          From the three retirement assets identified above, a retiree must think through their ability to create a retirement income. This income stream can also be thought of as a paycheck continuation plan for people who work as employees in a company. These paychecks and bonuses during pre-retirement went to goals such as retirement income savings, a down payment, or paying for weddings. At retirement, this paycheck changes into a retirement income stream which may go towards goals such as saving for a grandchild’s college, paying for medical expenses, or luxuries. All throughout, the income stream pre- and post-retirement must at a minimum cover the cost of basic living such as rent/mortgage, food, clothing, utilities, recurring payments, and everyday spending.

          The income derived from pre-retirement comes from the consumption of a worker’s human capital over time in exchange for their paycheck. Receiving a paycheck allows an individual to budget around their paycheck to pay for their lifestyle and make progress on their future goals. However, a retiree is constrained and unconstrained at the same time by assets available at retirement for retirement income. On the one hand, they have flexibility in drawing down assets to pay for expenses; on the other hand, overdrawing income from their assets could jeopardize their ability to draw assets in the future and substantially decrease their standard of living.

           The three popular current strategies for retirement asset drawdowns try to balance the assets and income through different accounting and behavioral finance models. I will outline some of the benefits and drawbacks to each model, while prefacing that each of these models may work for wealthier retirees based on their comfort level with the markets and their comfort working with financial professionals to carefully monitor their assets.

           The first approach a retiree may consider is the safe withdrawal approach. This approach looks at assets accumulated at retirement and allows a retiree to withdraw a portion of the assets as a percentage of total assets or as a stream of income with inflation adjustment. This approach tries both to preserve the legacy of the retiree and allow the retiree to take full advantage of their retirement assets during good years However, this strategy may endanger a comfortable lifestyle in the future if a market downturn impacts their retirement portfolio.

           During down market years, a retiree may have fewer assets to draw on for their budget, and they may have to take out principal to fund their cost of living. The strategy would force the retiree to compound down market years by either forcibly withdrawing additional assets to keep up with a fixed standard of living or scale back their standard of living. If they draw down additional assets, retirees participate less in the recovery which could impact future withdrawals so that the second invasion above a safe withdrawal may become more likely. Should they decide to constrain their lifestyle, retirees may be less able to enjoy the retirement lifestyle that they had begun to expect and some fixed costs, such as medical costs, are required and cannot be adjusted.

           Older retirees may also choose to make gifts or provide emergency assistance to help struggling family members during retirement. These gifts to family members may throw their overall budget off for that year, requiring additional withdrawals of principal above their safe withdrawal amount. On one hand; it makes sense to assist family members, but on the other hand, the assistance should not come at the cost of constraints on the retirees future life style.

           Lastly, the safe withdrawal strategy will also require the individual to regularly meet with their financial advisor meaning they should have a certain level of trust so that they may have their hand held throughout the retirement income creation process during market fluctuations so they may make withdrawals with some measure of comfort.

           Another approach a retiree can take is the bucket approach. A retiree segments their retirement portfolio into immediate income, middle-term income, and long-term income needs buckets. Their portfolio is easier to understand and may allow for legacy planning to build up over the long-term bucket based on the results of the market. One of the key drawbacks to this plan is that the overall portfolio looks very similar to the safe withdrawal approach. The overall asset mix can lead a retiree who does not have proper income to draw into their other buckets in the same ways as the safe withdrawal approach. This strategy will require less hand-holding from the advisor as a retiree can visualize the income needs in the “safe” immediate bucket and can make determinations as to the safety of retirement by looking at the other buckets.

           The last income generation strategy presented by most advisors revolves around flooring. This concept asks retirees to identify a list of items they feel they “need” and to build a “floor” of guaranteed income with their retirement assets. The rest of the assets remain tied up in the capital markets. The flooring model has the benefit of providing a stream of income for a bare minimum lifestyle and offers the benefit of potential upside if the markets do well. The negatives to this strategy are the difficulty in determining are needs versus wants for retirees who may not have thought through their retirement picture.

           The retiree may overshoot how much they needed to save, and be unable to leave a legacy for their beneficiaries. Furthermore, a larger portion of the retirement assets may be needed if interest rates or cost of annuities go up before retirement. An increased income generation cost would force an individual to purchase income outside of the price range of their original plan and potentially decrease the overall assets for the beneficiary. The good news is that the flooring strategy allows for the least amount of advisor hand holding as most of the basic needs of the retiree are taken care of, and their overall assets are available at retirement to potentially cover their wants. A retiree may benefit from reviewing their remaining assets and going over legacy concerns with an advisor from time to time.

           Each of these strategies descrived above have immediate and far-reaching benefits for advisors, their clients, and society in general. However, I contend that these strategies are impractical for most retirees because they do not properly reflect the pre-retirement income budgeting strategies learned over the course of the pre-retirees life time or how to strategically enable the use of their home as an income generation asset. Furthermore, these strategies will give the client greater anxiety over the course of their retirement as the markets fluctuate and they see their assets drawn down. The draw down style strategies creates a burden on retiree’s spending to preserve assets for their legacy or creates fears that the retiree may run out of money. In all these strategies, a successful retirement outcome may just be to have had enough retirement dollars to make it through retirement and drawn down all their retirement assets right before they pass away. I suggest that we focus on a new strategy that solves for the practical behaviors and lifestyles at retirement as opposed to strategic allocations of capital to create maximum draw down strategies.

           After thinking through the merits of the strategies above, I contend that the true “win” scenario for a retiree should be the creation of a steady and predictable stream of income at retirement. In addition, this income stream should allow the retiree to have some flexibility in what sort of assets they wish to leave as a legacy. Lastly, the strategy should benefit from having an advisor but not necessarily require constant advisor guidance on new lifestyle calculations based on market results.

           I feel that these goals can be best achieved by regularly “previewing” retirement income by building out multiple “ preview points” during the asset accumulation period. These “preview points” allow a pre-retiree to look at their overall accumulated assets and create a retirement income stream scenario based on the annuitization factors of that point in time. At the same time, a pre-retiree will look at their accumulated present net worth. Once these two points have been determined, a pre-retiree could use their retirement funds to purchase the minimum amount of a differed income annuity with inflation protections to lock in the annuitization rate of the most appropriate annuity of that time to “preview” what the retirees estimated retirement income stream may look like at retirement. At the same time the retiree purchases the annuity, based on their net worth of all their assets minus all their liabilities, the pre-retiree would also purchase an offsetting amount of life insurance paid up at retirement age.

           At retirement, the retiree should work with a financial professional to decide which annuities pay the highest-level income and allows the retiree to trade all their retirement accounts into the annuity that provides the highest level of income. If the retirement income of the annuity and Social Security Income are not enough, a retiree can then decide on lowering their legacy preservation goals. Because a home is often one of the greatest assets at retirement, a pre-retiree could consider “annuitizing” their home using a tenured reverse mortgage which provides a guaranteed income stream if life insurance has covered the home value. Alternatively, if the additional required stream of income is relatively small, a retiree may choose to annuitize the life insurances into a single premium immediate annuity. This strategy allows a high payout rate that could potentially provide for the shortfall at retirement rather than draw down home equity and risk the inability to repay the loan if home values increase significantly during retirement. Additionally, should emergency expenses occur during this time, a retiree may have to look at drawing into their home equity using a reverse mortgage with a line of credit option that they can pay back through their annuitized income streams or preserved life insurance death benefit.

           By following this “robo”-retirement strategy, a retiree can re-create a paycheck and live a stable and comfortable lifestyle within a set budget while having a more structured legacy preservation model. I believe that this strategy, while potentially not providing the greatest total withdrawal over the course of retirement, allows a retiree to better plan for their budget at retirement and better control their cost of living around guaranteed payments. Any dollars that can be spared go towards the legacy preservation. This strategy requires the least amount of advisor input as the end strategy will revolve around choosing the most appropriate income stream for retirement.

Reality of Retirement

          Because I agree that this strategy will potentially underperform bucketing, safe withdrawal, and flooring strategies from an actuarial standpoint, I will make a case for this strategy on the merits of stability, ease of retiree lifestyle transition, and continuity of strategy success.

           An elderly client will have many challenges in retirement. When it comes to their ability to draw an income, society has not yet had an opportunity for a mass study on the psychological effects of drawing down a finite liquid resource that is supposed to continue indefinitely towards death. The only periods of time we have available for study on the concept of mass retirement and the leisure it affords are in the late 1800s5 as an old-age pension. It would not be until 1978 that the 401(k) plan began to roll out4 as a cash deferral plan. The myth of the 401(k) as a stable and well understood retirement plan is untested.

           The stability provided by an annuitized payment in the form of consistent checks gives the retiree a sense of continuation of their pre-retirement budgeting style. Many retirees drew paychecks before retirement. The learned behavior of paycheck drawing over the many years of working for an employer should not be so easily discounted. The mentality of living week to week with a constrained source of income allows many novice budgeters to create a de facto budget that allows them to live within their means. With retirement accounts representing the present value of all future sources of income, a retiree must create a budget around variable income. In good stock market years, this could mean creating withdrawal habits that are above their anticipated life styles and potentially lead to developing a false sense of wealth. In market downturns, this could potentially cause a retiree to suffer a lower standard of living and to at least take away their false sense of wealth from earlier withdrawals. This points at the fact that the retiree would be more behaviorally suited to continue a stable stream of income approach.

           Another way to think about this strategy is to look at the possibility of each retirement year individually and separate from overall assets available in the retirement portfolio. As a client goes from year to year, market variability will require a retiree to review their draw down strategies. Because markets do not tend to go up or down forever and each individual point in the market at the time of review may be different from the end results for the year, a market participant is subject to four distinct possibilities because they do not know the end results for that year of retirement. Furthermore, the severity of the downturns and the withdrawal needs could magnify the negatives or positives of the end results for that year. I have illustrated this “retiree’s dilemma” in the chart below and argue that each one of these quadrants are unavoidable in the current retirement strategies employed in the mass market.

           These market risks are acceptable in large sovereign wealth funds and pension funds, but uncomfortable in smaller personal retirement accounts. The dollars available for growth are necessarily bounded by past contributions and do not benefit from additional contributions (as is the case for pension funds and sovereign wealth funds). The dollars available will only decrease as dollars are decreased by necessary withdrawals whether it’s to complete required minimum distributions or life style maintenance.

           The solution to the four quadrants of pain at retirement dilemma is to maximize the guaranteed income by removing the variable balance issues at retirement. By guaranteeing income streams, retirees can remove themselves from market uncertainty as they draw income. By removing the depletion equation, retirees can change their spending habits in meaningful ways. By learning to budget with their retirement income, the retirees are encouraged to continue to save for big spending items such as helping family members, going on vacations, or enjoying the fruits of their labor without jeopardizing their long-term retirement stability.

           Should an emergency occur, the retiree limited in their ability to jeopardize their income stream but may look to draw on legacy assets such as the cash value of life insurance and equity in their home. Most of the retiree’s retirement income stream is protected from over drafting or under drafting concerns through annuitization of most of their retirement assets into income. As income needs change or need supplementation, legacy assets in life insurance and home equity can be drawn down or annuitized so that greater income or immediate cash can flow to the retiree. As spending habits at retirement come into view, these slight increases in income per month or emergency reserves could have a large impact on a retiree’s overall retirement lifestyle and immediate needs.

           Lastly, financial planners and advisors have an ultimate constraint from their full fiduciary duty by the business model of retirement planning. Assets must remain above certain levels in order for them to receive service, financial advisors change firms or retire, and financial products and strategy advice change over time; so what works well today may not be best in class in the future. These changes are fine at a younger age as pre-retirees can pivot their strategy through greater contributions of their human capital towards retirement, form new relationships with new financial advisors, and purchase new financial products for retirement. However, as a person ages into retirement, their ability to do these three things degenerate through the drawdown of retirement assets, the lack of time or sometimes desire to have new advisors, and the impossibility of switching strategies is bounded by the risk tolerance and understanding of the financial products by the more elderly client.

           To ignore the fact that the business model of asset management requires assets is to disregard the reality of retirement planning. Assets drawn down over time receive less levels of financial service as their balance decreases. Understandably, the advisory practices in place today are businesses looking to expand their clientele and to offer great service at cost to clients or themselves. A business can certainly upfront the costs to themselves for client acquisition in the short term but will need to offset these costs in the long term either through reduced services to lower balance clients or a higher cost to a newer client. Retirement planning services as they stand today may not indefinitely provide the same level of service to the retiree throughout retirement. This circumstance may require financial firms to either pivot clients into a new sort of service arrangement, change the strategy being used by the retiree, or ask them to move to a different firm that can service their account balance.

           A retiree must have a strategy that is simple enough for them to understand with incentives for financial firms and advisors to service these accounts. The ease of receiving a guaranteed paycheck for life and the financial advisors desire to sell them that guaranteed paycheck as a fee for service arrangement in the form of commissions allows for the alignment of interests. The ongoing receipt of payment will suffice the client until they require more income whereby the advisor and the client can look through other assets originally earmarked for the legacy building to increase income. Those assets provide the advisor with an additional incentive to work with the client on securing the best product available on the market or to liquidate assets on behalf of the client to again perform the fee for service responsibilities.

           To ignore the business aspect of retirement planning is to ignore the incentives already set in place and to leave out a critical part of the client-advisor experience that must always align business interests with the client’s goals.

“Robo”-Retiring Professionally

           Does the “set it and forget” it nature of the “robo”- retirement planning from annuitization require no other duty than the selection of a retirement product, or does the use of life insurance for the legacy or future retirement income streams mean that financial planners are obsolete and to roll in the self-service robots? I do not believe so. A retirement plan does not consist of products; it consists of ideas. At the core of retirement is the idea of financial freedom and security. Freedom and security are at odds with each other, and philosophically there will exist trade-offs with any strategy.

           I propose a new retirement planning system wherein retirement planning happens through holistic financial planning that focuses on the budget and allows for the retiree to create security of income and freedom of lifestyle within that budget.
  1. A pre-retiree works with a financial planner to create a financial plan that covers their finances holistically towards retirement. The strategy includes setting a budget that properly reflects their pre-retirement lifestyle and expenses and tracks their progress over time.

  2. This financial plan will include the provision that every few years, a portion of the client’s retirement goes into a deferred income annuity guaranteeing to create a “previewing period” to lock in income payouts so that over time the financial planner can monitor and project out retirement lifestyle projections with clarity.

  3. At the same time as this “previewing period” the financial plan calculate out an “offsetting” amount of legacy protection for existing net worth so that the client can have the freedom at retirement to choose between leaving a greater legacy or to create additional income through their legacy assets.

  4. The financial planner will consistently monitor and aid in the budgeting of the pre-retiree throughout their pre-retirement career and build up client rapport.

  5. The pre-retiree will approach retirement, and at this point, they must decide if the income that they have created for retirement is sufficient.

  6. If the amount is sufficient, the client will annuitize and live off the income and leave the legacy to their heirs untouched.

  7. If the amount if insufficient, the client will annuitize those portions of the legacy as are needed to sustain their lifestyle.

  8. The advisor must at this point continue to help the client with budgeting at a cost to the retiree. At this point, the retiree must weigh whether the cost of the budget preparation services of the planner is reasonable or if they can manage their stream of income and have sufficient skill at managing their budget that they have created with the advisor over the course of their lifetimes.

  9. If the investment advisor or planner should retire or have left their practice, another advisor or planner should step in and implement this plan from where the other advisor left off.

           By integrating directly within this “robo”-retiring system, the planner sets out clear expectations and strategies for the client while building a pathway towards retirement that is consistent with the client’s lifestyle pre- and post-retirement.


           Personal Finances are humanistic and personal but could be streamlined to provide “robo”-like efficiency. There would be no need to do financial planning if everyone was only interested in speculative maximization strategies based purely on the potential dollar-denominated gain. That is because every retirement plan would just include best trend in the industry asset classes based on backwards looking data. However, I believe that pre- and post-retirees have lives that are often chaotic and constrained by their ability to understand every facet of a retirement strategy and sometimes small human errors at retirement could lead to outsized losses.

           By returning to a more simplistic format of retirement planning as annuitization and legacy protection, a retiree can enjoy retirement in peace, allowing them to focus on the things that matter most to them rather than worrying about their retirement prospects on a day to day basis.

          I challenge financial firms across the industry to re-think the retirement lives of their clients. I challenge retirees to press for guaranteed lifestyles and less confusing strategies. I challenge financial professionals to reimagine and innovate the way they see retirement planning by planning humanely. Together, we can work together to recreate retirement planning, not as a series of asset classes and dynamic drawdowns. But rather, we can light the path to a world where the retirement planner can act as a coach, confidant, and confidence builder.


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