How Middle-Market Retirees Make Their Retirement Decisions

Betty Meredith, CFA, CFP®, CRC®, Director of Education, and Research, InFRE

Betty Meredith, CFA, CFP®, CRC®, Director of Education, and Research, InFRE

By Betty Meredith, CFA, CFP®, CRC®
Director of Education and Research, InFRE

As financial planners, we know that when someone arrives at retirement age and doesn’t have enough financial assets accumulated for retirement, there are still things they can do to substantially increase their retirement security even if the decision to retire has already been made, either by them – or for them.

I recently observed two of eight focus groups held in Chicago, Baltimore, Chattanooga and Phoenix, comprised of mid-market retirees ages 63-75, grouped by number of years in retirement (five or less, more than five), level of retirement assets (under $150k, and up to $400k) and gender.  Acceptable focus group participants were retirees who retired voluntarily and who were considered as being at high risk of running out of their money in retirement; in other words, those who are required to make tradeoff decisions.

Our goal was to learn about how retirees made their decision to retire and how they manage assets during retirement. The resulting research report, “The Decision to Retire and Post-Retirement Financial Strategies,” was sponsored by the Society of Actuaries and conducted by Matt Greenwald of Mathew Greenwald & Associates.

Insights into the retirement decision-making process

In a nutshell, most of the study’s participants didn’t follow a decision-making process because of: A. the uncertainty implicit in planning what life might bring, B. the difficulty of planning for an unknown length time, and C. it’s just not how they are wired.  Since all of this totally goes against the grain of a financial planner’s DNA, how can we use these insights to make a difference in how we serve the mid-market?

Below is a suggested series of questions you can use when a client or family member approaches you with the news that they are about to retire, and you know they are not retirement ready.  The planning decision-points in the left column are in preferred order; Social Security claiming and asset management questions should come later in the decision-making process. The right column contains what the focus groups’ participants were thinking and have done at these various decision-points in order to provide you with behavioral finance insight into why and how your mid-market clients and family members might make their choices.

Be prepared for resistance.  Tips to remember:

  1. People are more apt to drop their resistance to your suggestions when they perceive that you view the world as they view the world; in other words, they are more likely to trust your judgment. 
  2. People who are insecure usually protect their egos, and they might resist listening if they perceive you are implying that they’re making a bad decision.
  3. People are more likely to buy-in to your point of view when you communicate short and long-term benefits in ways they make sense to them (their self-interest).
  4. People are also more likely to buy-in to changing their decision when they help create or are involved in creating alternative courses of action. 

You’ll need to weave all of this into how you help them reconsider their decision.

Questions to help the mid-market make informed decisions BEFORE they retire  How the focus groups’ retirees made the decision to retire and how they manage their money in retirement
  1. How did you run the numbers/make an informed decision about if you can afford to retire?
“I didn’t ask anybody’s opinion. I just told my husband that’s what I was going to do.” Most had not done a formal retirement plan, nor used worksheets, calculators or sought the advice of spouse or a retirement professional to make their retirement decision. They focused on expected cash flow for the current year, and did not factor inflation into their decision. Some discussed their retirement with their spouse or co-workers, but many reported telling their spouse they had decided to retire. Of those who worked with a financial advisor, most did not ask the advisor if they could afford to retire. Advisors who offered an opinion did not provide a written plan to help validate their recommendation. They did not distinguish between getting advice from a financial planner or a broker. These retirees also did not choose retirement to pursue their dreams, a hobby or start a business. They said they decided to retire due to health of self or spouse, changes in the workplace, and the need to provide caregiving for loved ones. In many cases, when probed further, their “voluntary” retirement could be considered involuntary, or even a “push.” Many of these retirees had been retired for 5-10 years already, so the Great Recession was not a factor in their choosing to retire.Most were content with their decision to retire, believing that the extra income they could have earned wouldn’t have made that much of a difference. However, very few were past the 18 year mark when annual inflation at 4% has doubled expenses.
  1.  How well will your essential expenses be covered by Social Security and other lifetime income sources?

“You just know. You list your expenses and you list your income and you see what’s there. Then you hope to God that whatever the money you’ve invested is going to take you when inflation moves in and it’s no longer covered.” In most cases, retirees made their decision to retire based on Social Security, pension, and work income from self or spouse to cover their current monthly bills. For these individual, Social Security can be their primary source of lifetime retirement income. Their priorities are to preserve their savings, limit debt, and control spending. They manage their cash by focusing on expected cash flow in the current year; they were very aware of their regular income and expenses. They don’t think long-term. They don’t withdraw from their retirement savings to pay for short-term discretionary spending like vacations or other “luxury” items; instead they reduce the amount they travel and spend. They are very adaptable when making spending decisions and reducing spending when needed.Some maintained a “slush fund” to help them manage/give themselves permission to spend on discretionary items.
  1. How long do you think you might live?

“All my relatives. I just wrote down the numbers when they passed away. I came up with an average. Okay, what’s my general health? That’s how I figured it.” There are gaps in their understanding about longevity – they didn’t think much about their life expectancy – as indicated by their short term planning horizon. Overall, family history was considered to be a good indicator of their personal life expectancy. However, when participants were asked how those whose parents died younger should do things differently than those whose parents died older, the overwhelming response was that it makes no difference. Anything can happen; it’s difficult to plan for it; so it’s better to wait and see.
  1. What are your greatest retirement risks/what are you most concerned about going wrong?

“Major financial concern is that the money will last long enough.” In general, the retirees concluded that planning for their situation is not effective. They do not plan for shocks and long term retirement risks. What they can control is to make adjustments when the unexpected arises, including increasing health expenses. They self insure by doing what they can to preserve their assets, limit debt and controlling spending. They place little emphasis on risk management products and many were not well prepared to weather a substantial shock. They generally do not consider inflation in their spending projections as they only look out a year at a time. They have gaps in knowledge about longevity and other retirement risks.
  1. How might delaying Social Security improve your retirement security?


“My best friend kept saying, “Don’t do it. Don’t do it. Don’t do it.” I regretted it afterwards, but that is quite a bit of money that I could have still had. I had two close friends pass away before they were 60, and I said who knows? I might not be around either.” Claiming Social Security early (a bird in the hand) is used as a risk management tool. Most claimed at age 62 after they performed a simplified breakeven analysis determining how long they must live to breakeven with if they claimed later. This approach obviously ignores longevity an inflation risks for themselves and/or their spouses.
  1. What changes are you planning to make to your retirement assets in order to manage risk and produce lifetime income, such as purchase a longevity annuity or access home equity?
“I spent more time working the money when I was still working, and after I retired it’s set in its place where it should be and I don’t work with it as much.” Most owned their homes and had paid off their mortgage; overall they were very careful about debt. Most were strongly averse to using their home equity. Generally, they plan to stay in their home, and some were open to downsizing. Their investing goal is to preserve their assets at the level they were when the retired. Obviously maintaining asset value with inflation was not as important. They’re not well prepared to deal with any kind of shock such as long-term care, and they do not focus on utilizing financial risk management investments to provide protection from shocks. Most did not have a plan for taking systematic withdrawals from their retirement savings. At age 70 ½, they took their RMDs.

One other finding that extended across length of time retired, asset levels, and geographic locations are the significant differences in experiences, feelings, concerns and perceptions by gender.  In the focus groups I observed in Chicago, men were more optimistic and more likely to think they could handle any financial situation that arose, even to the point of being over-confident or unrealistic, because intuitively they know they’re at risk and are maybe “putting on their game face.”  Women were concerned about care-giving obligations and family relationships, and vulnerability to running out of assets, long-term care, and being a burden to their children.

What do we need to change to facilitate informed decision-making?

As I think about how these people made their decisions, easy to use, accessible decision tools and/or advice were not available to them, so they winged it.  A somewhat common thread was that it wasn’t worthwhile to consider the unpredictable since they can’t do anything about it anyway; “it is better just to live one’s life.”

However, even if do-it-yourself tools were readily available, it is likely most wouldn’t have used them on their own because:

  1. over 80% of the population have do-it-with-me and do-it-for-me financial styles, and
  2. the real danger of garbage in and garbage out when the inexperienced attempt to evaluate and make complex retirement tradeoff decisions.

The mid-market will need a professional with software to help them navigate matching lifetime income to their expenses, use of longevity annuities, identifying how health-related costs will be funded, when to claim Social Security, and use of home equity to lengthen the duration of their retirement assets. The Department of Labor published Final Investment Advice Regulations in December, 2011 that amended the Employee Retirement Income Security Act of 1974 (ERISA) to allow advisors to provide advice face-to-face to employees on retirement savings investing products, where the advisor earns a commission (otherwise known as “conflicted advice”), as long as the software package used is audited annually and confirmed as unbiased.

The next step  – that of providing retirement planning advice in the workplace versus just investment advice – is now a realistic possibility. Patient-centric, time-efficient models like those used in the medical field which provide individualized yet streamlined access to a professional to evaluate needs and make decisions are now the primary roadblock. New products and retirement strategies as being designed by leading retirement professionals who want to serve the middle market. I predict that in a few short years, we’ll be able to serve the middle market using technology that provides the guidance they desperately need, and in a productive and profitable way.

Betty Meredith, CFA®, CFP®, CRC® is the Director of Education and Research for the International Foundation for Retirement Education (InFRE), and Managing Member of the Int’l Retirement Resource Center, LLC. She participates in and incorporates research findings and best practices into InFRE’s Certified Retirement Counselor® certification study and professional continuing education programs to help professionals meet the retirement preparedness and income management needs of middle-market Americans.

This article was originally published in the December, 2013  Journal of Financial Planning (

(c) 2013, Betty Meredith

Posted in: PLAN for Retirement Readiness, PROVIDE Retirement Income, Retirement Income Planning and Spending

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