- 7-Minute Article
- Oct 20, 2017
The Future of Retirement and How to Help Prepare Your Clients for It
The Insights Panel from Brighthouse Financial looks at the retirement of tomorrow.
Retirement is changing. Significant social, economic, and technological forces are already reshaping how we live, work, and plan for later life. The Insights Panel, a group of leading independent experts brought together by Brighthouse Financial, discusses the challenges and opportunities for financial advisors and their clients.
The retirement landscape is undergoing radical change. Retirees are living longer and in greater numbers than ever before, but they are facing a future in which they may no longer be able to rely on Social Security.
Erica Orange and Jared Weiner, futurists and trend consultants at The Future Hunters, described what they called the “Expanded Mortality Horizon” — the fact that due to increases in longevity, clients today are planning for a retirement that could last as long as 50 years.
Jared explained that because retirees are healthier and “more vital” than ever before, retirement is increasingly seen by clients as a time to pursue fresh opportunities.
“It’s almost viewed as lazy or complacent if you settle into a relaxing traditional kind of retirement now,” said Jared. “So a lot of retirees are looking to be more active than ever before. They’re looking to pursue passion projects. They’re looking to start businesses, become first-time entrepreneurs.”
Shrinking Social Security
But Michelle Connolly, economist at Duke University, said that in the future individuals will need to rely “much more on themselves to guarantee a steady stream of income” to finance the retirement they prefer.
“In the 1940s, only one percent of the population were beneficiaries of Social Security. Last year that was about 20 percent,” she said, adding that longevity, health costs, and negative population growth are increasing pressure on a system that the Social Security administration itself believes is already facing insolvency by 2034.1
“Most Americans rely predominantly on Social Security right now and don't have their own plans, so that's a serious issue because after the fact you can't really catch that up.”
One of the issues that advisors face when trying to ensure their clients are properly prepared for retirement are “built-in” human behaviors that make it difficult for human beings to plan effectively for the future.
We care too much
Behavioral economist Dan Goldstein explained that when it comes to putting in place plans for retirement: “It looks as though people don’t care at all. But another way to look at is that they care about it so darn much, they’re just unwilling to think about it at all, and so they’re just going to go along with whatever the default is.”
He used the example of employers automatically signing employees up to pension programs, explaining that most people never change their contribution.
“People just take the default. It’s very hard to get away from that because it avoids all of this decision making. It avoids all of this potential regret of trying to do something, and doing the wrong thing.”
The future is difficult
Dan suspects that there may be an evolutionary reason. Until recently humans never had to plan a long way into the future because they lived much shorter lives. Their energies were instead focused on day-to-day decisions.
“It’s hard to think about the future,” said Dan. “There are a few reasons for this. One is that there are just so many ways the future could turn out. Thinking about all of them would just take too much time. In fact, it would take all of our time… and because of that, it’s aversive.”
“The other reason people don’t like to think about the future is because they’re, frankly, afraid of it.”
And Dan thinks there is a chance that modern technology make be making the problem worse.
“The present might be getting more interesting than it’s ever been, and sucking away more of our time. It makes it harder to think about the distant future … That didn’t used to be the trade off, but today it’s very easy to stay completely in the present.”
Dan Goldstein offered two potential solutions for advisors: be specific about the future, and help clients visualize the future.
Be specific about the future
“The role of the advisor is to help people while they’re still saving for retirement to get rid of all that vagueness,” said Dan.
He used the example of an experiment he conducted in which participants were asked to imagine they were 65 and had a $100,000 lump sum saved for retirement. Generally this was seen as moderately satisfactory amount. But when they were asked to imagine they were 65 with a guaranteed monthly income of $500 — the monthly equivalent of $100,000 — it was seen as completely unsatisfactory.
“Our research shows that talking about earning a specific amount of money in the future leads to more informed decision making about how much people should save for retirement,” he said.
Help clients visualize the future
Dan explained that modern technology offers advisors some very effective solutions to the problems clients have with planning for the future.
“If we can simulate the future for people, either through technology or by enhancing their imagination somehow, we take the future and we bring it closer. And when you have a close-up view of the future, then suddenly, you're engaged and you can make better decisions.”
Dan said that his research demonstrated that just reminding someone they are going to get older, by showing them an augmented picture of themselves as an older person, could help enhance decision making.
“You can buy a smartphone app for a few dollars that will take a picture and age it rather well,” he said. “Will every advisor want to use this? Maybe not … But you might be surprised.”
Mark Zinder, advisor coach and speaker, suggested a low-tech alternative.
“I’ve always said if you want to know what the future is going to look like, then ask someone who’s already experiencing it,” he said. “What does retirement look like? ... And that’s the benefit that you bring to the table by working with people that are already in the future where your clients are going to be.”
Economist Michelle Connolly described a “very large transition” in economic activity in the United States as a new high-tech society emerges and automation begins to replace people in occupations that were previously too complex for machines to do.
Robo advisors vs. human advisors
Financial advisors have already begun to experience this sort of competition from “robo advisors.” But Futurists Erica and Jared see a very bright future for human advisors, if they are able to adapt.
“There absolutely will be a place for advisors. Trust is going to be a huge factor in the client-advisor relationship. We always say that if you define a luxury in basic economic terms, it's something which is in extremely high demand and extremely short supply,” said Jared.
“And in a world increasingly being automated, where we're used to dealing with artificial intelligence, there is a luxury to having a trusted human relationship with someone who we know is listening to us.”
They see the advisor of the future needing to be a hybrid practitioner who is able to employ technology to do the heavy lifting for them and enhance the client experience, while the advisor focuses on developing their crucial “soft skills”, like emotional intelligence and critical thinking
“I see one circle, which is technologist,” said Erica, “I see another circle, which is life coach. And then when you put those two together, the intersection is really interesting. And I think that that’s where more financial advisors are going to have play.”
Jared agreed. “No matter how smart the technology is, no matter what algorithms it is crunching to try to figure out, it still cannot replicate the trust of a human, and the cognitive adaptability of a human.”