Help Clients Get What They Need, and Want, in Retirement

What You Need to Know

Untangling and probing a client’s target retirement spending can have important implications for how they think about and fund retirement.
Lack of protected income to cover essential expenses could leave many retirees exposed to spending shocks.
It is critical that advisors and their clients work together to appropriately model their needs and wants.

Figuring out the money one needs in retirement remains one of the most formidable challenges facing Americans today. One big reason why: Regardless of health, genetics, environment or lifestyle, no one has a crystal ball that can definitively tell us how long we’ll live in retirement.

The Alliance for Lifetime Income just released the first chapter of a four-part Protected Retirement Income and Planning (PRIP) Study, which surveys both consumers and financial professionals. The study examines the changing retirement planning landscape, shifts in consumer and advisor attitudes and behavior toward retirement security, and demands for protected lifetime income.

As a research fellow in the Alliance’s Retirement Income Institute, I was given early access to the survey data and was particularly interested in a few questions exploring how consumers view their retirement goals and how they are funding retirement.

Needs vs. Wants

While many advisors and most financial planning tools treat retirement as a single target — for example, asking the individual how much in total they want to spend each year (“I want to spend $50,000 a year”) — respondents in this study are taking a more nuanced perspective around spending, where their retirement income goal is broken out into a series of goals based on perceived flexibility.

Among respondents who actively thought about their annual target retirement income goal, roughly twice as many see retirement from two separate lenses: spending for essential “needs” and spending for nonessential “wants.”

Untangling and probing a client’s target retirement spending can have important implications for how they think about and fund retirement. In this ALI survey, respondents want to allocate 76% of those savings targeted to needs spending into safer assets (versus 24% in riskier assets), on average. In other words, safety and greater certainty are paramount among respondents when it comes to funding essential expenses.

Funding Gap

The portion of the retirement income goal that is deemed essential clearly varies by income level, where those who spend more tend to have more flexibility. For example, among those respondents with incomes less than $35,000 per year, 78% of the total retirement income goal is described as needs spending (and 22% wants), versus only 62% of the total goal among those respondents with incomes exceeding $200,000.

While these differences across income levels aren’t as large as my findings in past research, where I categorized expenditure types by total household spending using data from the Consumer Expenditure Survey, there is clear evidence that as total spending increases, the flexibility around spending tends to increase, as well.