If your employer came to you today and said, "We have a great new salary package. Instead of paying you a set salary, we are going to base your income on the stock market. If the market goes up, you will have a pay increase. However, if it goes down, your pay will drop." Would you like this? Most people I've worked with say they would not.
Working in financial planning with hundreds of clients over almost two decades, I noticed a theme, and this theme is consistent irrespective of my work as a Financial Planner in Stowe, VT, Burlington, VT, or even my home town of Frederick, MD. Clients come in communicating the same want using different language. They are in essence asking, Steve, can you inject financial certainty into my life? Where do they want certainty? Income and Healthcare.
Tony Robbins points out, as one of the six human needs, that we all carry a high need for certainty. This is especially true when it comes to financial planning around retirement income. Most of us spend our entire working lives trying to maximize income certainty, whether we need extra money or not. How often did you turn down a pay raise? Likely never. The more income certainty, the better.
Emotions of fear, doubt, and worry shine when retirement looms, and certainty is seemingly going away. The late Wayne Dyer, a renowned self-help author said, "F.E.A.R. is false evidence appearing real." Fear is one of those emotions to which our egos attach. We end up experiencing physical effects as your mind plays a story about what has not happened, or may never happen. I find clients coming to me for retirement planning are running some version of an ego dominated story centered around this.
Certainty, or the lack thereof, is a well-known psychological need into which the financial industry has so brilliantly sank its tentacles. Uncertainty of retirement income, uncertainty of maintaining health, uncertainty of market fluctuations, and many more are pillars that allow the financial industry to monger fear. My first manager when I was a new financial advisor in Frederick, MD use to say, "Picture the client sitting on a stove. Your job is to turn up the heat on the burner. They won't act until you do this." Recalling this conversation disgusts me to this day.
Things improve for financial institutions when large groups of people exist who posses the same fear. This is when their product designers and marketing experts can create a product pledging to mitigate or remove uncertainty. What is an example of this product? Annuities.
Annuities come in many varieties, but most have designs to provide some level of retirement income guarantee. Annuities are transacted by matching a person's willingness to transfer the risk of producing guaranteed retirement income in return for a premium, or expense, paid to an insurance company who will then provide the guarantee. Many people find this trade-off worthwhile, and are willing to pay high costs, both direct and indirect, just to feel more certain.
Unfortunately, many enter into this exchange without fully knowing what it is they are buying, and without quantifying the impacts or fully understanding viable alternatives.
A good rule of thumb to remember is insurance companies profit by maximizing cost to the consumer, while minimizing coverage or guarantees. Meanwhile, consumers want the maximum benefit at the minimum cost. Who is the person advocating for the consumer as they enter this arrangement? Who helps them understand the foreign language of annuity jargon, and mathematical calculations, tables, and graphs created by a math whiz working for the insurance company? Herein lies the problem. The person who is there to help the consumer, the insurance representative or financial professional, is often incentivized through a commission, and is not a true advocate for the consumer representing their side of the contract.
The consumer hears the benefits and how the product cures the fear, doubt, and worry emotions and gravitates to increase certainty because certainty is a need. A retiree, for example, may be so engrained in their “false-evidence-appearing-real” that they enter into a contract – a contract that has little chance of loss for the insurer. The retiree may not understand the true benefit they are receiving, nor the holistic costs involved.
If you are thinking you want to increase retirement income certainty, it is important to first look at your “false-evidence-appearing-real.” What is driving the fear? From where does your need for retirement income certainty stem? Assume your worst fear came real today. What would be your reaction tomorrow? How would you respond, and what steps would you take? Pausing to assess your fear may be one of the best financial decisions you ever make.
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