Longevity risk, Social Security maximization, diversification—these concepts are fundamental to conversations between advisers and their older clients. But they can be hard to explain in words alone, without an illustration or diagram.
You’d think it would be easy to find such images. Tons of relevant charts and graphs can be found on most financial services company websites. And financial planning software can generate multitudes of colorful retirement projections in a flash.
But just as the department stores are filled with beautiful clothes but no one looks especially well dressed, images that produce a shock of financial recognition in clients’ brains evidently aren’t so plentiful. A while ago, we asked retirement advisers to share some of their most effective visual aids with us. The most common response: “When you find some, let us know!”
So we searched for some, and we found ten examples that you and your clients might find useful and entertaining. There’s no magic pill here to banish client confusion; adviser input will still be needed. But, according to Catherine Mulbrandon, author of An Illustrated Guide to Income in the United States and founder of Visualizingeconomics.com, that’s the most you can hope for.
“A well-designed graphic will help people find the patterns in the data and highlight the out-liers,” Mulbrandon told RIJ recently. But “its true power is how it can be used in a conversation between the expert and the person unfamiliar with the subject by making the data clear and accessible.”
Inflation: Postage stamps tell a story
With today’s e-mail and texting, postage stamps are one of the buggy-whips of the information age. But many older people will remember, as children, collecting rare stamps in glassine sleeves or peeling the foreign stamps from airmail letters.
You can’t lick old stamps when it comes to illustrating inflation. David Laster, director of Investment Analytics at Merrill Lynch, shared a slide of vintage stamps (right) at the Retirement Income Industry Association conference last March. By showing clients that the price of a first-class stamp tripled from 1975 to 2005, he gives them an idea how much the price of most things could rise during their lifetimes.
Inflation is central to any retirement income discussion. Pre-retirees and retirees worry as much about inflation as they do about health care, surveys show. Advisors know that inflation protection is a big reason for retirees to own equities. If you decide to use the stamp method, try creating your own progression of old stamps (search for “commemorative stamps” at Google Images). For more precise inflation estimates, use this calculator.
Prioritizing: Maslow’s pyramid
Wealthy clients (unless they remember the Depression) don’t always differentiate between needs and wants, advisers are known to say. Even their necessities are luxurious. They tame snowy roads with BMW X-5s, even if Toyota Highlanders will do. Bosch D-Ws clean their dishes, even when a high-end Kenmore would suffice. And the habit may extend right into retirement.
Retirement usually requires budgeting, however. A retirement income planner’s typical first chores include helping clients identify their baseline expenses or needs (often to calculate the amount of safe or guaranteed income they’ll need). Another important step is to help clients prioritize their goals (and figure out how to finance them).
To illustrate his theory about the hierarchy of human needs, the 20th century psychologist Abraham Maslow created a pyramid (a simplified version is at left). It’s been adapted for many purposes, including financial advice. New retirees or near-retirees may feel strong but vague needs for security and fulfillment; advisers can use the multi-colored pyramid as a prism to help clients get more specific. You can design your own pyramid, leaving the layers blank so that clients can ink in their own personal hierarchy of needs and goals.
Savings adequacy: Otar’s zones
The Toronto-area adviser and public speaker Jim Otar doesn’t like to waste time finding out if prospective clients have enough assets to retire on. He has a system. It involves simple but mathematically explicit diagrams. He asks clients to divide their total assets ($1 million, say) by their first year withdrawal during retirement. This number is the Client Asset Multiplier, or CAM.
The CAM can help people determine whether they don’t have enough money even to buy an inflation-adjusted life annuity large enough to pay for their basic retirement needs (Red Zone), if they have more than enough money, even without the safety net of an annuity (Green Zone) or if they are somewhere in between (Gray Zone).
This little diagram, Otar says, can tell the adviser which emotion he or she needs to focus on when talking to clients (hope or fear), whether the client can afford to retire with what he or she has now, and whether an income-generating annuity should be part of the discussion.
Asset inventory: Bachrach’s “Financial Road Map”
Bill Bachrach of Bachrach & Associates is a successful adviser who successfully trains other advisers. His online store sells items that other advisers can use in their practices. Among the items is a 17” x 22” piece of heavy stock printed in money-ish green and black on both sides and called “Financial Road Map for Living Life on Purpose.”
It’s really just a large worksheet with blank tables embellished with just enough map-like imagery to give clients a sense of planning a trip. There’s plenty of space for advisers and the clients to document the clients’ current cash reserves, debt, investments and insurance policies. There’s also space to list personal goals, along with blank cells for noting the date targeted for achieving the goal, the estimated cost of achieving the goal, the priority of the goal and two or three words that describe how the client will feel when the goal is reached. “The Financial Road Map” isn’t fancy, but its potential for helping advisers make clients feel more comfortable about sharing sensitive personal financial information is obvious. Packs of 30 can be purchased at Bill Bachrach’s website.
Asset diversification: Callan’s “periodic table” of investment returns
Some images produce enlightenment without much explanation. Callan’s annual “periodic table” of returns, which ranks the performance of 10 stock and bond indices for each of the previous 20 calendar years, is one of them. It’s a vivid wake-up call for clients who don’t fully grasp the volatility of market returns or the importance of diversification. “The Table highlights the uncertainty inherent in all capital markets,” says Callan’s caption.
The rankings are relative, not absolute. For instance, the Barclays Aggregate Bond Index returned only 5.24% in 2008 and the MSCI Emerging Markets Index returned 79.02% in 2009, yet they stand shoulder-to-shoulder as the performance leaders for their respective years. A printable copy of the periodic table is available at www.callan.com.
Behavioral economics: Carl Richard’s line drawings
Some advisers just use a pencil or a pen and a legal pad to illustrate financial concepts to their clients.
Anybody can draw a simple cross-section of a descending staircase, for instance, with steps showing the drop in income when a wife stops working, and when a husband stops working. The now-common income graph that almost every computer-generated retirement planning workup uses probably started out as a back-of-the-envelope drawing or a sketch on a legal pad.
The guru of simple Sharpie drawings is Carl Richards, a certified financial planner, author of The Behavior Gap, and New York Times columnist. He’s responsible for at least hundreds of simple graphs and Venn diagrams drawn on napkins or blank pieces of paper, each dedicated to illustrating a home truth about investing. One of the simplest and most direct is at left. You can see many of his drawings at behaviorgap.com, and buy high-res copies of any of them for $99 each. Or you can try drawing your own.
Time-segmentation: Macchia’s pillars
Few of us are CPAs but behavioral economists say that most of us practice “mental accounting.” We divide our wealth into notional categories. We distinguish between “play money” and “pay money,” or “college savings” and “retirement savings” and so forth.
That may explain the popularity of “bucketing” and “time-segmentation” as retirement income planning methods. The technique of designating different chunks of wealth for use soon (cash), later (bonds) or much later (stocks), or for necessary or discretionary purchases, etc., can lend a reassuring architecture to the fog of retirement. Ladders of bonds or income annuities also qualify as forms of bucketing. Purists call bucketing an illusion (especially if it implies that stocks are safe in the long-run). But illusions can help get clients through the night.
Creating an illustration of bucketing—perhaps as a cascade of periodically rebalanced accounts—is as easy as clicking-and-dragging pictures of buckets from a free graphics website onto your desktop. If you’re not a do-it-yourselfer, you can take advantage of images like the one above, which Wealth2K, creator of the Income for Life Method, uses to illustrate a time-segmentation method.
The complexity of decumulation: Pfau’s bulls-eye chart
Retirement income planning involves a lot of moving parts. There are as many potential solutions to the income challenge as there are retirees. Accumulation was so much easier. The bulls-eye chart developed by Wade Pfau, Ph.D., a professor at the American College and widely-published retirement researcher, can serve as a mental organizer for all those moving parts.
“The Retirement Income Challenge” is the title of his copyrighted chart, which consists of a circle in the center labeled “PROCESS: Combine Income Tools to Balance Goals and Risks” surrounded by three concentric rings labeled, from outermost to innermost: “Income Tools” (containing 20 sources of income), “Risks” (14 hazards) and “Goals” (six basic financial goals). Pfau posts a pdf of the chart on his blog.
Product allocation: Cloke’s glidepath
The retirement glidepath chart is now almost universally used by retirement planners. The x-axis of these columnar charts represents the years of retirement and the y-axis represents cash flow. Designs vary, but it’s common for the columns, like a row of test tubes, to be filled with the amount of income the client will receive each year. Different sources of income are typically represented by different colors.
The Burlington, Iowa adviser Curtis Cloke uses the chart at left to illustrate his proprietary retirement income method, known as Thrive. This particular chart includes both the accumulation and decumulation years. It uses the color green for the protection products, yellow for cash reserves and red for equities. Glidepath charts, which many financial planning software products can generate, are often able to speak more clearly to clients than spreadsheets can.
Glidepaths are easy to abuse, however. Depending on the underlying assumptions about investment returns and spending rates, they can easily be manipulated to give clients the reassuring impression that they will have far more wealth at the end of retirement than when they started.
Social Security claiming: The Impact Technologies grid
Ever since someone realized that the annual deferral bonus for delaying Social Security from age 62 to age 70 is far higher than the return on any other low-risk asset, there’s been unprecedented excitement around the much-maligned Old Age and Survivors Insurance program. A lot of advisers now use Social Security claiming strategies as a hook for client meetings and prospecting seminars. Software vendors have come up with a variety of Social Security maximization tools.
The Social Security Explorer software from Impact Technologies Group in Charlotte, N.C., uses a color-coded, nine-by-nine grid to make the claiming process more transparent. Each square represents a combination of ages (62-70) when spouses can choose start benefits.
Depending on the couple’s inputs, the software considers seven Social Security claiming strategies and executes 567 calculations for 81 age combinations. Then it puts a star in the box that represents the best ages for them to start benefits, and explains how to file. The grid, in blue, greens, magenta and beige, lends visual interest to a potentially dry task.
Websites referenced in the story, plus a few more:
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