Financial Literacy Declines in Later Life: Dr. Michael Finke at DAC

Those who earn more live longer, the longevity gap between men and women is closing and living close to your kids in retirement may turn out, well, differently than you may think. All of these factors and more will change how you think about retirement planning, according to Dr. Michael Finke, a keynote speaker at the Distinguished Advisors Conference (DAC) in Puerto Vallarta, Mexico, last week. But his biggest “aha” moments came from research on the financial literacy of seniors.

Dr. Finke, who is a professor and director of the Retirement Planning and Living Center at the Department of Personal Financial Planning, Texas Tech University, shared ground-breaking and fascinating research. Like other speakers at the DAC, he emphasized how important soft skills are in times of transition, and this is especially significant as clients age. Advisors can add value by looking beyond the numbers, by taking a more holistic approach to their clients’ financial life, family, and overall welfare, particularly in retirement.

One important reason is that as clients start to decline physically and cognitively—we all inevitably do by about 1-2% annually, and much more precipitously after age 80—families will need to rely even more on their most trusted advisors for financial advice.

Problem is your clients may not even know they need more help and advice and, in fact, may not want it. Finke highlighted a study showing that although their financial literacy actually does decline significantly in later years, seniors’ confidence in their own ability to make financial decisions does not decline. This finding is particularly concerning considering that 78% of people in their nineties will have some cognitive impairment or dementia.

Finke’s recent research has also focused on satisfaction in retirement. He has found an almost linear relationship between money and satisfaction during this life stage: The more money retirees have, the happier they tend to be (at least up to about $3.5 million in assets, after which they appear to be slightly less happy). Other major factors that affect satisfaction in retirement? Not surprisingly, health and the closeness of the relationship with your partner. Also, kids make you slightly happier… but, if you live within 16 kms (10 miles) of your kids in retirement, that will make you significantly less happy!

Clearly, advisors have a critical role to play in contributing to the financial welfare of their clients in retirement, as well as to their overall happiness. Serving these aging clients and their families well is an opportunity to fulfill a purpose in your practice, beyond just getting the numbers right; although, that’s very important too.

“Early thinking on retirement planning was that we should smooth our spending throughout retirement, with the goal of averaging out the decumulation,” he said. But Finke’s research shows that this approach is not that efficient and we should be thinking about planning retirement income in a whole new way.

He revealed that, on average, retirees spend about 1% more in the first year of retirement than they did before retiring. The early years of retirement are the most active and investment returns in the first five years, particularly in the very first year, have an outsized impact on the sustainability of a retirement portfolio.

Therefore, planning retirement dates is important: Retiring into a down market can have an enormously negative impact on your clients’ future financial well-being. In fact, returns in the first 10 years of retirement will have a greater impact than returns for the subsequent 20 years of retirement. The situation is exasperated by current economic forecasts (see Canadian Economic Forecasts Gloomy, this issue), ongoing low returns, volatile markets and the fact that people are living longer in retirement.

Next year’s Distinguished Advisor Conference will be held in San Diego, November 6 to 9, and the theme is Soar Higher: Plan for Your Greater Potential.

Additional Educational Resource: MFA Retirement Income Specialist program.