The road to self-discovery

When it comes to planning for retirement, clients articulating their desired future is more key than crunching numbers which is where American adviser Richard Miller comes in


What you do not know can hurt you – particularly when it comes to planning your retirement. For instance, many Americans do not realise that by postponing retirement from 62 to 70, they can claim 76 per cent more in social security government pensions.  

They also do not realise how much they can build their nest eggs by controlling spending, because they will gain both the saved money and the investment income from it.  Or they do not understand how to use their homes, their biggest asset and expense, by taking a reverse mortgage.

Good retirement preparation requires a broad overview. “Investment management, which trades your risk and return, does not change your fundamental position,” explains Steve Sass, associate director at the Center for Retirement Research at Boston College.

Sass says US financial planners place far too much emphasis on investments, and not enough on basic goals like financial literacy, budgeting and maintaining compliance with a saving discipline.  Many clients cannot even accurately describe their total income, assets and debt, their insurance coverage, their estate plans, their portfolios’ performance over time, or their discretionary spending patterns.

Contemplating some of these shortfalls, Richard Miller, a financial adviser in Wellesley, Massachusetts, has created an original description of American financial planning models, and highlighted gaps in the three main theoretical approaches used by professional planners. Miller presented his paradigms, soon to be published as a conference volume, last year at the Pension Research Council at Wharton School at the University of Pennsylvania.

First, he paints a picture of the dominant models: the Traditional, Life Cycle and Behavioral paradigms. He then explores a fourth approach, which attempts to plug some of the gaps in the three standard practices. In reality, of course the categories often overlap. “I looked at some areas no one is addressing,” he explains.  “It would be wrong to say advisors are not focused on these gaps, but they have no structure yet to turn to. We would hope to see this natural progression as the profession develops.”

Three roads to retirement

The vast majority of advisors follow what Miller and his collaborator Paula Hogan describe as the Traditional route. That path concentrates on investments, and is rooted in Modern Portfolio Theory.  The adviser takes an accounting perspective, adds up all income, subtracts spending, and tracks the net impact on a client’s portfolio. “A plan is said to succeed if the portfolio balance is positive at death,” Miller describes.

But the Traditional paradigm fails to distinguish between “risk capacity”, that is a client’s ability to afford risk, and a more psychological  tolerance, or “stomach” for weathering asset price volatility. Traditional advisers generally encourage holding stocks over bonds in the long run, based on principles of mean reversion, and they work hard to help clients stay the course in volatile markets.

The second, the Life Cycle model, is favored by both Sass and Miller as a state-of-the-art version. That route basically “focuses on lifetime income and spending and thus recognises human capital, the net present value of lifetime earnings, as the central asset,” according to Miller. Therefore, as human capital declines with age or fluctuates with circumstances, clients should adapt risk. The Life Cycle model recognises that people care more about their living standards than the total sum of their wealth; money is not the end in itself. To maintain a stable living standard over a lifetime, clients are prompted to smooth out their consumption, by transferring purchasing power from their productive working years to the retirement period, when they will presumably earn less.  

“You need to control today’s consumption so you can have consumption tomorrow,” Sass says.  For that reason, the Retirement Research Center advocates the use of Target Date funds, using a calculator for saving and investing that allows people to dial their risk up or down.  

Finally, the third Behavioral model adds perspective by examining clients’ biases for making decisions, and in Miller’s words, it also tries to “figure out what will actually make them happier”. Advisers can frame alternatives to help clients make more rational judgments.  The aim is not to nudge or manipulate them but to support better financial decision making, such as by reducing an overly confusing number of investment options.

A new avenue

The Life Cycle model may be our best bet for now but it too still fails to address paramount life issues like meaning, value, needs, wants and goals. So Miller has come up with a more holistic way, to encourage self-discovery.

As an example, he typically sits down himself with clients as a couple. Assume that both members are working and managing their own human capital. Suppose they have children, and one parent wishes to stay home. Miller can tell them what impact that arrangement will have on the human capital of the stay-at-home spouse, and he can explain how it will preserve and enhance the value of that capital if that spouse can “stay connected”. They must consider that if a spouse is returning to work part-time, and needs to hire child care, the net wage may be low.  They must also confront emotional attitudes; which spouse ears more has emotional repercussions.

The softer side of financial planning, which involves a more intense engagement, clearly requires time and exploration, especially as it is so customised to each client’s unique preferences and outlook. But Miller is optimistic, citing that “the declining cost of computing has made it less expensive to deliver the technical side, so there is more room for counseling”.

The bottom line is that crunching numbers, or even guiding cognitive decisions, is not that complicated. What really matters is to make sure the overall plan aligns with the client’s interests. Compliance is key, and staying on budget tends to be more behavioral than just running numbers or creating allocations. Once a client can articulate a desired future, a planner can design iterative steps geared toward a cumulative implementation.  Sass says: “We try to use certain interventions to get people back on the wagon, so thereafter they can self-direct.”


Vanessa Drucker is the American Editor of Fund Strategy, based in New York City. Vanessa can be contacted at