The Role of Flexibility in Successful Retirement Planning

Tamara Burden, Managing Director - Pension and Endowment Risk Management at Milliman Financial Risk Management LLC, shared her thoughts on successful retirement planning at RIIA’s recent Summer Conference. 

Success in retirement is, in large part, due to a retiree’s flexibility responding to unexpected shocks.  When considering all sources of capital – human, social and financial – clients can realize a truly robust response to shocks.  Being prepared to tap into capital sources beyond the dollars in a retirement account can help clients avoid running out of money and provide greater peace of mind in the planning phase.

According to a recent study from Wells Fargo, 49% of people end up retiring earlier than they planned, and only 7% because they had saved enough money to retire early.  Between the ages of 55 and 62, one in four people suffered a health-related work limitation (a health shock severe enough to affect their ability to work), one in five suffered a job layoff, one in five got divorced or were widowed, and one in four started taking care of an elderly parent.

Advisers tend to significantly underestimate the degree of flexibility and the depth of the resources available to clients. Traditionally, the focus on withstanding shocks in retirement revolves around financial capital: on saving more, on creating a cushion, on downsizing a house, on buying insurance. But RIIA has taught us that there are three sources of capital everyone can tap: human capital, social capital and financial capital.

Think of a very extreme health shock – something like surviving a brain aneurysm. Or an extreme financial shock – a tornado destroying the neighborhood, a flood without flood insurance. The social networks kick in – the client’s church takes up donations, a friend starts a GoFundMe account on their behalf, the community comes to help rebuild the home, a child moves home to care for them. When it comes to assets, nothing is off the table – they sell their car, use their “rainy day” fund, take out a reverse mortgage or sell the house. The point is, they adapt. They access sources of capital they never even thought about before, and they make it through.

When success in retirement depends on flexibility, successful retirement planning should include some brainstorming and thoughts around the sources of flexibility.

Let’s start with human capital. This is an amazing world we live in today. I’ve seen a lot of articles that talk about the ‘aging of our population’ and how this is likely to result in a shrinking economy as we end up with a smaller workforce. But personally, I think we are going to see exactly the opposite because of the way in which the barriers between our skills and the people who can use them are being broken down. Two hundred years ago we were an agricultural economy, which then became an industrial economy. For the last few decades we’ve been primarily a service economy. But we are quickly moving into a new framework – a “sharing economy” as it is being called now. This is the Airbnb and Uber phenomenon.

What is happening, and very rapidly, is that the ‘middle man’ of an employer is no longer necessary to translate skills into income:  Have a car and like to drive? Uber. Have a big house that’s fully used, or you are frequently out of town visiting the grandkids? Airbnb. Like dogs and would love to pet sit? There’s an app for that! DogVacay or Rover. Have an extra car only used occasionally? Try RelayRides or Getaround. Like to cook? Check out Feastly or MealSharing. Is the client a casual handyman, can they hang a picture, replace lightbulbs, cut up a fallen tree or rake leaves?  Maybe they don’t mind waiting in line for hours for the best BBQ in Austin.  Perhaps they can add someone’s weekly grocery shopping run to theirs.?  Then check out TaskRabbit!  Do they have power tools, a tall ladder, a trailer?  They can lend them out for a fee on NeighborGoods.  If they can build a website, are a graphic designer, write well or constantly annoy friends by correcting the grammar and spelling in emails, Upwork might be the place for them.

No single one of these jobs is likely to take the place of a full-time income, and none of them offer benefits, but as a way to make ends meet in the event of job loss, a health shock that prevents working in the current job, or just extra income in retirement, the flexibility can’t be beat!

Now let’s look at social capital. I was discussing this with my parents and I had a hard time getting them past the idea that accessing social capital is essentially looking for a handout or accepting charity. Yes, some sources of social capital are that: GoFundMe, a church collecting donations for you. But what if a neighbor mows their lawn and in return the client invites them over to dinner?  Or they need a ride to the doctor one day and the neighbor wants a date night so the client watches the kids? The client is saving financial capital that would be used for a lawn service or a taxi ride by accessing their social capital instead. And the world of technology is connecting them, with apps like NeighborFavors, TradeAFavor, NextDoor, or Lotsa Helping Hands. Each of these are great ways for clients to give back, and feel valued as well!

One of the great sources of flexibility in financial capital that is greatly underutilized is accessing home equity via reverse mortgages. Shelley Giordano has published an article on the topic in the latest issue of the Retirement Management Journal®, and has written an excellent book as well, available for free on Kindle Unlimited: What’s the Deal with Reverse Mortgages?  Something that blurs the lines between social, human and financial capital are crowdfunding programs like Kickstarter, CrowdRise and IndieGoGo.  If clients suffer a job loss, know that the largest demographic in the entrepreneurial world is actually baby boomers… not millennials.

As an adviser, knowing that HALF of all people end up retiring earlier than they intend to, one of the greatest services can be to help clients learn about and brainstorm options should something unexpected happen. The great gift of the sharing economy is to open many possible doors that hide deep stores of human and social capital.

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