I’d like to take a moment to introduce you to Joyce (NHRN). Joyce has been a client of ours for the better part of two decades. She retired about 6-7 years ago and has enjoyed a solid retirement so far, including the occasional cruise with her husband and daughter. We haven’t had to talk Joyce off of any ledges and the frequency of our interactions have been unremarkable, if not the same as any other client. So, outward appearances would suggest that retirement is working out well for Joyce.
Working out well, however, is a relative descriptor—we all have our own definitions and standards, so one person’s perspective could certainly differ from another. I don’t know about you, but I was raised not to judge a book by its cover, so I try not to make assumptions or take things for granted—i.e., I don’t want to rely solely upon a person’s words or outward appearances to indicate how they might be feeling. To be clear, this does not mean that I will nag someone to tell me how they feel—I just want to be sure to ask the right questions if I sense that there might be concern.
As for Joyce, I haven’t asked her about this directly, but I would imagine that she would tell you that she hasn’t done everything that she has wanted to or could in retirement. Why is this? My impression has been because of a concern she has carried with her of not knowing whether she was free to do so. Some observations that I have made have led me to this conclusion.
First, when Joyce retired, we implemented a plan involving a bucket strategy for her retirement income—a certain amount of funds was designated for short-term income, another amount for medium-term, and yet another amount for long-term. Conversations early in Joyce’s retirement tended to focus on the short-term bucket and there were indications that there was a certain amount of stress that she was feeling as the value of those funds fluctuated—she understood that the short-term funds were not her only resource, but she worried about the short-term lasting as long as we were planning.
A second observation was definitely more of an abstract nature: there was a general sense, albeit not overwhelming, of discomfort in conversations we would have during reviews and at other opportunities. If I had to describe it, I would say it was kind of like she was struggling to just get comfortable in retirement. My hunch was that it was related to the change of having to rely on the resources that she had accumulated for income, as opposed to being comfortable in knowing that she would have a paycheck from her employer and focusing on accumulating more assets. All of this, of course, was coupled with the recent memory of the market crash of The Great Recession. In psychology, there is a concept referred to as waiting on the other shoe to drop.[i] The basic idea of this concept can be captured as a sense that things are going too well. Questions that Joyce would ask and topics that she would raise indicated that she was concerned about what the unplanned might have in-store for her financial aspirations.
It might be fair to say that the general sense of tension surrounding Joyce culminated in my third observation. In a review meeting at the beginning of this year, Joyce was obviously stressed, but she shared with us what she was feeling and why she was feeling that way. Her husband is on the verge of retirement (within a year or so) and there were questions about his benefits upon retirement, including the amount of his pension, and Joyce and her husband weren’t getting very clear answers, on top of not knowing exactly what elections were going to be best for them. Further, Joyce was open with us about the fact that she had some unplanned dental work that needed to be done and she was concerned about the impact the bill for the dental work would have on her financial resources. As I listened to Joyce speak, it was pretty obvious to me what she needed from us: she needed a way to make sense of what felt like chaos to her—she needed a way to understand how everything that was being thrown at her would fit together. To some, that might sound like Planning 101, and I suppose it is, but there is a point about our planning practices around which I would draw a distinction.
It’s been my impression and experience that Planning 101 tends to be reactionary. In other words, in a situation like that of Joyce, someone might say, “Well, the answer is obvious: we just need to run the analysis to show you the impact of the decisions and bill you are facing.” That’s all good and well, but I’m always on the lookout for a better way of doing things, if not the best way to do things, and it strikes me that taking that approach is akin to treating a symptom (acute problem), not the illness (chronic problem).
What was Joyce’s symptom? Her general level of unease, but more immediately, the stress over facing decisions related to her husband’s retirement and her dental bill. What was her illness? Chaos; or more specifically, questions concerning the extent to which she was financially free. Typically, my observations have been, and Joyce’s situation certainly bears this out, that questions about financial freedom really concern how financially resilient someone is. The default response, in the absence of analysis, seems to be to hunker down, so to speak—to protect oneself against the threat of financial vulnerability. Consistently, I have seen this manifested as an unnecessarily conservative lifestyle or the belief that someone will just have to simply forego achieving certain goals.
So, what’s the key distinction to be made about our planning practices? The distinction is whether we focus on treating the symptom (the acute problem of the stress in the moment) or treating the illness (the chronic problem of feeling vulnerable and exposed). In other words, we might be able to show Joyce what the best decisions would be for her husband’s benefits and that she can afford her dental work, but that doesn’t address the question of how financially resilient she is overall.
As I mentioned above, Joyce has been a client for nearly two decades, and our services and perspective have certainly grown over that time, as they should. Within the last year or two, I have begun implementing advanced stress tests for clients. Typically, you will find stress tests that assess a plan’s resiliency in a bear market, or if a spouse was to pass away, or if a major health care event was to take place, etc.. The advanced stress tests are designed to check the resiliency of a plan based on maximum, unidentified, and unplanned expenses that can be afforded over various periods of time and in various conditions.
These tests are the result of situations and questions that have been raised by clients, similar to that of Joyce. Some additional examples are clients asking about what happens if budget estimates for retirement aren’t accurate, if the cost of sending a child to college is more than they planned, or if they end up having to support a family member, among others. In essence, the questions and concerns reveal the kinds of things that people fear might jeopardize their plan, but that my experience tells me rarely get addressed proactively. Fundamentally, when those kinds of questions are raised, I have determined that clients are saying, “I am concerned about what ‘x’ means for my plan and, because of the chaos I feel with all of the moving parts of my plan, I need help making sense of it.”
My impression of what it’s like to be in that kind of situation is that clients see a scenario in their head for which the outcome is so uncertain that it plays out over and over in their mind without resolution. If this is left unaddressed, it results in the client feeling vulnerable, and it is specifically this perceived vulnerability from which the client must be liberated, as if they are being restrained. In the case of Joyce, we had not had the opportunity to update her plan with our advanced stress tests. Upon hearing of her concerns, and combining that with my previous experience with her, it was obvious to me that chaos had been causing her to feel vulnerable and that I needed to assess the resiliency of her resources.
There’s an interesting phenomenon that I have observed in my own life and I have certainly seen it play out with clients. If I was to define it, it would be something like this: you must define the ways in which you are vulnerable before you can understand the true nature of your resiliency. If I was to put it into financial planning terms, I would say: you must define the conditions under which your plan will fail before you can fully appreciate and realize the life that you can afford to enjoy. In dramatic terms: you have to know what will kill you before you can truly live. This proved to be true with Joyce.
When I updated the analysis of her plan, it became apparent what the most beneficial decisions would be, with respect to her husband’s benefits, but most importantly, it became clear just how resilient her financial resources were. The advanced stress test analysis revealed that what she could actually afford as a one-time expense, without dropping her probability of success to an unacceptable level, was more than 8000% of the cost that she had been quoted for her dental work. When I met with her to provide the findings, I asked her, “So, how many people are you going to take to the dentist with you?”
There were two things that Joyce did, one immediately and one a couple of months later, that confirmed that I had addressed the illness that was plaguing her. The first thing that she did was relax. Her shoulders fell, her face softened, and she reclined back in her chair—it was obvious that she was feeling relief. A couple of months later, and by far the most exciting thing to me, was that she emailed me to tell me that she was going to buy a second home at the beach. I cannot tell you how floored I was by this news. Not long after receiving that email, I called Joyce simply to emphasize how awesome I thought it was that she was going to be purchasing a place at the beach and that the entire reason I love planning so much is perfectly encapsulated in her story.