This is a post I originally wrote for the Financial Planning Association. As it's one of my favorites and is no longer available via the FPA blog, I wanted to share it here.
Retirement security is a little bit like "the cloud" in that it's something we all know we want, but most of us aren't 100 percent sure what it means. As a result, a potentially important component of most Americans' financial future is in danger of becoming a buzz phrase.
With the possible exception of the healthcare industry, the financial services industry reigns supreme when it comes to the overuse of acronyms, technical jargon and, of course, buzz words and phrases. I want to ensure that "retirement security" doesn't suffer the same fate as "leading edge," "think outside the box" and "paradigm shift" in taking the dreary march toward a complete loss of meaning. To go a step further, I want to help you, as an investor, take the first steps toward changing "retirement security" from a nebulous concept to something deeply and intimately personal for you and your family (if applicable).
Let's start by defining "retirement security," via Annuity Digest: "[Retirement security is a]…very broad term that refers to the level of comfort you have with the resources that are intended to support you through retirement and provide a standard of living similar to what you experienced before retirement."1
I like this definition because it combines the touchy-feely nature of the term (i.e., level of comfort, standard of living) with the very concrete aim of retirement security (i.e., resources intended to support you through retirement).
In my opinion, the emotional and psychologically-driven items in the definition are just as important as the hard monetary goals, with both representing equal importance to American savers and investors. As such, before we get into the nuts and bolts surrounding your quest for retirement security, I think it's important to discuss the "why" behind retirement security.
As referenced in the title of the article, at its most basic level, retirement security is an immensely personal concept. I believe this is an important thing to keep in mind, because it can help you avoid comparing your retirement to others. One way to bring things back to a personal level is to think of retirement security as a recipe.
PREPARING THE RECIPE FOR YOUR RETIREMENT SECURITY
To use an analogy that's close to my heart, look at how many different ways there are to prepare a delicious burger. No single approach is generally accepted as the "right" way to make and grill a burger, because everyone has "their" specific recipe for success. The point being, your recipe may differ from others, but it's your recipe! While there's no one-size-fits-all formula for everyone, I like to think of a retirement security recipe as being comprised of three basic parts: the master plan, the money and the mindset. As the money is fairly self-explanatory, I want to focus on the master plan and the mindset, as they fall on the more emotional side of the scale.
To begin with the master plan portion, "retirement planning" is another extremely broad term. From a retirement security perspective, I would caution against treating "retirement planning" as pertaining only to money.
One of the most interesting statements from a variety of the retirees I’ve talked with is that, while they had planned how they would retire from the workforce, they never really thought about what they were retiring to. The point being, the ability to keep busy doing something interesting turns out to be just as important to many retirees as the money they had saved to replace a recurring paycheck. As such, planning for what life will bring post-work can become an integral part of your retirement security recipe.
In terms of mindset, perception can serve as a major stumbling block when it comes to retirement security and confidence. We have always suspected that fear and stress can impact our physical health, but we now have the science to back it up. Lissa Rankin, MD wrote "How Fear Makes You Sick" in January 2013, and the article still serves as one of the most valuable treatises on what stress and fear can do to the body.2
In the article, Rankin outlines the phenomenon that our "lizard brain", the oldest and most primitive portion of the human brain, is basically a computer that can't tell the difference between life-threatening fears and those that are less imminent. Regardless of whether we are being chased by a hungry bear or stressed out about an upcoming deadline at work, our brain forces our bodies to react in the same way. As you might expect, beyond possibly escaping from the bear in a true life-or- death situation, these fear responses are not good for our health over the long term, as Rankin explains:
"If you're getting attacked by a cave bear, your body ignores sleeping, digesting, and reproducing, while it focuses on running, breathing, thinking and delivering oxygen and energy wherever it deems it necessary in order to keep you safe…When your body is in the stress response, it can't repair itself…When the stress response is repetitively triggered, organs get damaged and the body can't fix them. The cancer cells we naturally make, which usually get blasted away by the immune system, are allowed to proliferate. The effects of chronic wear-and-tear on the human body take their toll, and we wind up sick."2
Since we already worry about money more than any other facet of our busy, crazy lives,3 the constant fear of not having saved enough for retirement, extrapolated out over many years, is bound to affect our bodies over time. Compound your concerns about retirement planning with the myriad other stressors out there, and the emotional aspect of security can actually make quite a bit of difference to your physical well-being.
Beyond the potential physical impact of the stress and fear responses surrounding retirement uncertainty, mindset can become an issue if you fall into the trap of comparing your outlook with family, friends or peers. For example, you may have friends who "feel" completely secure and are happily awaiting retirement, while others are very pessimistic about their plans for the financial future. It pays to remember that their views are entirely based on their specific recipes.
As money can be viewed as an extremely intimate and personal thing, you will likely never know about that portion of your friends' and family members' future plans. Your peers may be planning to downsize and have decided they need or want less money in retirement. They may be expecting legacy money from a family member or, in a worst-case scenario, they may just have no idea how much money and planning it actually takes to transition into the financial future of their choosing. On the other hand, by virtue of their propensity to worry, your pessimistic friends may actually be better equipped than anyone else to reach a "secure" financial future.
Few things can be more positive for our mindset than to remind ourselves to focus only on the thing we can control: our own personal retirement security recipe. Your mindset can be optimistic, pessimistic, realistic, or some combination of all three, as long as it works for you.
ADDING TO YOUR RETIREMENT SECURITY RECIPE
Once you have thought long and hard about the three M's (Money, Master Plan and Mindset), write your recipe down, put it in a safe place and get to work! Like any good recipe, remember that you can scribble in the margins, and add a dash of this or a pinch of that along the way to make something good even better. The following represent a few ways others have chosen to enhance their personal retirement security recipes.
RETIREMENT SECURITY AND THE VALUE OF SHARED EXPERIENCE
If we believe that it’s just as critical for those leaving the work force (however that may manifest itself) to have something to retire to as it is for them to be financially prepared, I think it’s valuable to discuss the importance of peer involvement when it comes to retirement security.
Yes, retirement security is a personal feeling, and I firmly believe that comparing your situation with others is often counter-productive. However, don't be afraid to share ideas and talk about how you're feeling with your friends, colleagues and peers as you approach retirement planning or retirement itself.
If you think about it, being emotionally unprepared (even if you are comfortable financially) is a very natural response, as retirement is something that you simply cannot fully comprehend or visualize until you get there. Yet, because the blanket of "retirement security" does not generally expand to cover how you're going to feel on the first day of the rest of your life, the barrage of emotions can likely be a major shock.
There may be no way to fully prepare for this type of unwanted surprise, but hearing how others have coped or are coping with the feeling may be a good place to start. Even if you don't have loved ones or close relatives who have left the workforce, your neighbors, peers and colleagues likely do. If you're active on social media, you might also look into groups based in your local communities, as this can be a great way to meet like-minded individuals. Above all, don't be afraid to ask!
FINANCIAL PROFESSIONALS AND RETIREMENT SECURITY
If you've been reading the news, you know that the advisor profession has been under fire from certain agencies and sectors as of late. While I won't go into detail in this article, much of the conversation stems from a recently implemented Department of Labor (DOL) Rule designed to regulate the adherence of all financial professionals and providers of retirement advice according to a fiduciary standard.
At the most basic level, the idea behind the proposal is to ensure that those providing retirement products, planning and advice do so in the best interest of their clients (U.S. investors). Obviously, there's a lot more to it (Google "DOL Fiduciary Rule" for more information), but one of the main implications behind the proposed rule is that advisors/financial professionals have not been working in the best interests of their retirement clients up to this point.
I'm not going to sit here and tell you that one side is 100% right and the other is 100% wrong. As with any industry, financial services tends to contain more gray areas than black-and-white. This can be difficult to accept, since human beings tend to want things to be simple: good vs. evil, right vs. wrong, etc. Unfortunately, it's rarely that simple. In the case of the financial professional relationship, every situation is different because every financial professional is unique.
If you're considering a relationship with a financial professional, it's important to remember your recipe – it's not about what everyone else thinks, it's only about you. What you can do is be as informed as possible. In situations like the DOL Rule, with arguments at opposite ends of the spectrum, sharpening the grey area is often the best we can do. You will see statistics and data out there that paint a negative picture of financial professionals, and you will see those that are positive. When confronting these types of issues, use a variety of sources of data from each side of the argument, consider the source in each case when looking at the data, and fact-check vigorously.
For the purposes of this piece, I will offer you recent data showing that financial professionals can have a positive impact on investors' perception of retirement security. According to LIMRA,4 a worldwide association of insurance and financial services companies, consumers who work with a financial professional are:
Further, eight in 10 consumers who work with an advisor believe that he or she helps them in ways they would not be able to achieve on their own.4 Does this mean that you need to work with a financial professional to attain a higher level of retirement security? Of course not. Could a financial professional be part of your recipe, now or in the future? It's certainly possible. I urge you to gather as much data as possible on the value of a financial professional (as well as the opposite) so you can complete your own analysis and draw your own conclusions.
RETIREMENT SECURITY AND THE POWER OF KNOWLEDGE
A third, and equally important facet of retirement security (in my opinion), is the knowledge you gather on your own. I encourage you to do the research, find your favorite types of content and mediums and make financial education materials part of your recurring reading list.
Remember, every investor is unique, and what works for you might not work for your neighbor (or vice versa). Because retirement security is so personal, it's also subjective, meaning that no amount of money or planning is the "right" amount. Ultimately, retirement security hinges on how you feel. If you've crafted your recipe with love and care and followed your own instructions faithfully, I hope you can crack a smile when you think about pulling the final product out of the oven.
1 n.a. (2015). Retirement Security. Annuity Digest. Retrieved from AnnuityDigest.com.
2 Rankin, L. (January 31, 2013). How Fear Makes You Sick. LissaRankin.com. Retrieved from LissaRankin.com.
3 n.a. (February 4, 2015). American Psychological Association Survey Shows Money Stress Weighing on Americans' Health Nationwide. American Psychological Association. Retrieved from APA.org.
4 n.a. (2015). Informing the Debate: Facts About Retirement Security. LIMRA Secure Retirement Institute. Retrieved from LIMRA.com.