Vol 10, No 3 - Financial Planning Association of Malaysia

etirement, you can ease their anxiety
and cure their finertia by helping them
develop an income strategy. The process,
which involves charting the client’s
retirement expenses and sources of
income, takes the mystery and complexity
out of the “magic number” by breaking it
down into categories to which your clients
can relate. You can use charts that look
just like a standard budgeting worksheet,
with estimated discretionary and
nondiscretionary expenses in one table
and retirement savings and investments
in another.
but a complete reversal. Plummeting
home values have damaged a great deal
more than our pocketbooks — many an
ego has been badly bruised.
Adviser Takeaway. Understanding the
complex and deep-seated emotional
attachments people have to their homes
is the first step in helping repair the
damage for clients who made the mistake
of viewing their homes as retirement
accounts. Getting them to see that a
house is a shelter and not an investment
is the first step. If you can convince
them of that, they will be more open to
considering alternative options.
Some of the solutions are surprisingly
simple, but can have a tangible effect on
a very complex problem. For example,
retirees who don’t have a lot of equity
in their homes might want to consider
renting a smaller house in retirement.
For clients who plan to stay in their
homes, overpaying their mortgages by
US$100 or so a month can save them
tens of thousands of dollars over the life
of the loan and dramatically reduce the
number of years they will be paying off
their homes. 1 This last option is a perfect
example of how a small, seemingly
inconsequential decision can have a
significant effect on the retirement
planning continuum.
Number Numbness
Whether it is the staggering sums
reported in relation to the federal deficit
and national debt, or the elusive “number”
representing an adequate retirement
nest egg, people are easily overwhelmed
— and subsequently numbed — by the
sheer size of numbers that seem too large
to comprehend. Number numbness leads
to what I have dubbed “finertia,” which is
the paralysis that sets in when investors
try to make sense of contradictory and
confusing financial information. Finertia
makes the prospect of planning for
retirement too complex to face, which
may explain why so many people have
opted to simply do nothing.
For most of your clients, the most
numbing number of all is the amount
they need to comfortably retire. Even you,
as an experienced financial professional,
cannot say for certain what that number
should be. A Monte Carlo simulation
can supposedly account for hundreds of
thousands of potential market scenarios,
but no formula is advanced enough to
predict the future — there are simply
too many variables. The task is further
complicated by the human emotions
involved — you must factor in your
clients’ changing needs and desires,
their expectations, and the effects of
unanticipated family situations or market
movements. Macro issues such as inflation,
longevity, healthcare, and taxes add yet
another layer of complexity.
Number numbness is not only relegated
to vast quantities; it can also take the form
of “bigness bias,” which is the tendency to
be indifferent to small numbers such as 1
or 2 percent. Overlooking small numbers
can be a big problem when it comes to
accounting for taxes and inflation in a
long-term financial plan. Consider the
investors who were making big returns
on equity investments during the 18-year
bull market of 1982–2000. At the time,
inflation was barely perceptible at 1 or 2
percent annually, but it was still slowly
eating away at the purchasing power of
every dollar investors earned.
Adviser Takeaway. While you may be
powerless to predict the exact dollar
amount your clients will need for
Retirement planning is never going
to get less complex; in fact, the effects
of the financial meltdown we have
just experienced will likely exacerbate
the issue for many years to come. As
an adviser, it is your job to handle the
complexity based on your knowledge and
experience, while making the process as
simple as possible for your clients. Begin
with this lesson: every large amount
starts as a small amount — the key to
making your money grow is time and
discipline. It may seem overly simplistic,
but for anyone who is intimidated by the
numbers involved in accumulating the
money needed for retirement, this is a
compelling and comforting concept.
Layering—The Proxy Perception
Just as Las Vegas has learned that people
will toss chips around far more liberally
than cash, the credit card industry knows
very well that people treat those little
plastic rectangles differently than actual
money. Credit cards, debit cards, and
electronic bank statements are quick
and convenient, but these automated
forms of payment create a psychological
disconnect that makes money more
opaque to consumers. In behavioural
finance, the concept is known as
“layering” — a term borrowed from moneylaundering
that refers to the layers of
separation from the place where the
money was originally earned. The thicker
the layers, the greater the opportunity for
clients to make poor financial decisions.
The physical proxy of the check or
credit card creates one layer; we are
further removed from our money by the
expediency and opaqueness of the entire
transaction process at most retail outlets.
Signatures are seldom required when we
use credit or debit cards, and quite often,
“Finertia makes the prospect of planning for
retirement too complex to face, which may explain
why so many people have opted to simply do nothing.”
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