Building Certainty Into Your Retirement Proposition

In this five-minute read, Simon Aboud and Ensombl takes readers through the various fears experienced by retirees. He explores the practical tools and techniques advisors use to alleviate uncertainty and rebuild retirement confidence.

While they’re often referred to as “The Golden Years”, Australian Retirees are finding that retirement is less golf and holidays and more worrying about whether or not their savings will last throughout their lifetime. And this isn’t the only thing they’re worrying about.

Most people spend their whole lives looking forward to retirement, but when it finally arrives, it can be a pretty scary and overwhelming time. It’s perhaps one of the biggest transitions we go through in life, where everything about our world changes, and on top of that we’re faced with a bunch of questions that don’t have answers.

“In these matters the only certainty is that nothing is certain.” – Pliny the Elder

Humans are not hardwired for uncertainty… literally.

As a survival mechanism, the human brain is designed to seek certainty and perceive ambiguity as a threat.  According to the “Triune Brain” theory, the human brain can be divided into three parts:

The Reptilian Brain (or Primitive Brain) – The oldest part of the brain associated with primitive survival instincts.

The Emotional Brain (Limbic System) – The middle part of the brain that plays a crucial role in controlling emotions and behaviour.

The Rational Brain (or Logical Brain) – The newest part of the brain responsible for higher-order brain functions including cognition, spatial reasoning, and conscious thought.

While the Triune Brain theory is a useful way to understand the brain’s complexity and evolution, it’s important to note that this model is somewhat simplified.

When faced with uncertainty, our amygdala (part of the limbic system) may trigger a fear response. This emotional response can lead us to avoid risk or seek safety. Emotions can also create a  “shortcut” for decision-making, leading us to make decisions based on gut feelings or instinct rather than rational analysis and logic.

Other common ways our brains respond to uncertainty include overthinking, decision avoidance, bias towards negative thinking and information seeking.

Why is this important to know?

As Financial Advisers working with retiree clients, you are working with human beings who are constantly faced with uncertainty, and who might not always be operating from rational and logical thought.

By understanding how our brains respond to uncertainty, you can use this knowledge to support your clients in navigating the uncertainty they will face in their retirement years.

Through the use of soft skills and practical retirement solutions, you can help to alleviate your clients concerns about the unknown so that they can enjoy the safe and secure retirement they deserve.

Understanding what your retiree clients may be fearful of
Far from being a celebration, retirement can, for many, represent the loss of certainty across many aspects of their lives.

They no longer have certainty of income and will naturally be fearful that a lifetime of retirement savings may not be adequate.

Even harder to cope with may be the loss of certainty around their purpose in life. For the last 40 years they have had the certainty of their career, doing what they love (hopefully). If they owned a business or held a managerial position, they may have become accustomed to being a decision maker, a person others turned to. And now that has all stopped.

And then there is the uncertainty around you and your advice, especially if the client relationship is new. Will your advice be valuable? Can they trust you with their life savings? Can they afford your fees?

Looking through this lens you can see just how many fears retirees may be facing.

Addressing Fear Response
This instinctual response alerts us to potential dangers – and unknown retirement outcomes can indeed appear threatening.

With fear being a natural reaction to uncertainty, it is essential to acknowledge and empathise with your clients’ concerns. Sometimes talking about their fears is enough to alleviate them, but it also provides you with great insight into your client’s particular concerns, so that these can be factored into the way you interact with the client, and of course the way you structure their retirement plan.

Fear can often inhibit good decision making.  Client’s that are experiencing a fear response are unlikely to be operating from a rational space, so it’s important to pause and slow things down in these situations to avoid any knee jerk reactions and wait for the logical and rational thinking to catch up.

Having a comprehensive retirement plan that addresses the common concerns retirees have will also help to provide a roadmap for your clients, reducing the perceived dangers associated with the unknown.

Managing Overthinking
Uncertainty can lead clients to overthink about possible outcomes, causing undue stress. This overthinking is the brain’s attempt to gain control over an uncontrollable situation.

Help your clients break the cycle of overthinking by encouraging them to redirect their focus to all the things that they can control—things like their savings rate, spending habits, and investment decisions. Outside of their finances, they are in control of how they spend their time and redefine their purpose. Help them focus on concrete actions they can take now, rather than getting lost in future what-ifs.

For instance, having a regular review schedule for their financial plan can provide structure and reduce the temptation to constantly check and worry about their investments. This also reiterates that their financial plan is a living document that will change with them in response to changes in circumstances.

Overcoming Decision Avoidance
High levels of uncertainty may lead some clients to avoid making decisions. The brain often prefers the certainty of maintaining the status quo over the unknown outcomes of change.

To overcome decision avoidance, break down big decisions into smaller steps. Start with the easiest or least consequential decisions and gradually tackle more challenging ones.
Using a decision-making framework can also be useful here. This could involve identifying the decision to be made, exploring options, weighing up pros and cons, making a decision, then reviewing and learning from the decision. This structured approach can help your clients feel more confident and in control.

Combatting Bias Towards Negative Thinking
In uncertain situations, our brains often lean towards negative outcomes—a phenomenon known as the “negativity bias”.

Assist your clients in maintaining a balanced perspective by challenging negative thinking patterns, reframing negative thoughts, and highlighting the positives in a situation.
While it’s crucial to plan for potential financial pitfalls, focusing too much on negative scenarios can create undue fear. Remind your clients of their financial strengths, such as solid investments and a robust retirement solution.

Supporting Information Seeking
One of the most common causes of uncertainty, is a lack of information. Our brains respond to this by seeking more information in an attempt to reduce the unknown.
Ultimately, it’s why clients come to us for advice in the first place, for information and guidance to help them make decisions. This is why it’s so crucial for Financial Advisers to take the time to educate your client about the different solutions available. Err on the side of giving too much information if necessary and be open about the pros and cons of the different solutions available. Also be sure to set realistic expectations.

Traditional retirement income solutions still have their place, but individually they have their own limitations.
Account Based Pensions (ABP) are the most common product used by retirees to manage their income needs. However, these products have the potential to overexpose clients to market risk, longevity risk, inflation risk and behavioural risk, while failing to provide any concessional treatments for Age Pension purposes or providing any income certainty.

Tradition Income Stream products, such as standard lifetime annuities, are designed to provide more certainty, however, these are often perceived to be low value, inflexible, and can be restrictive in terms of access to capital, payment of death benefits and expose retirees to the potential for loss of capital.

It was the recognition of these limitations that led the introduction of the Retirement Income Covenant, which seeks to encourage financial service providers to design more innovative retirement income strategies to better address the core issues facing retirees.

As a result, we have seen more innovation, particularly in the retirement income stream space, with offerings that are a lot more flexible and offer a wider range of choice coupled with protected investment options.

In most cases, the optimal retirement income strategy – which addresses the client’s need for certainty – will incorporate both an ABP and a guaranteed lifetime income stream product.

Financial Advisers also need to be proactive in this space by designing fit-for-purpose solutions for retirees that deliver both the peace of mind offered by a guaranteed lifetime income and the higher returns and flexibility of an ABP.

By creating a diversified retirement solution, you can address your clients multi-faceted concerns, minimise their exposure to the common risks for retirees, and provide them with a quality plan that will give them the confidence, flexibility, and clarity they need to enjoy their retirement years.

Further reading
If you’re interested in finding out how to build certainty into your retirement proposition, you can access the Allianz Retire+ Whitepaper ‘A necessary shift: the future of retirement solutions in Australia’ here. This whitepaper takes a deep dive into the changing landscape of retirement planning and provides insight into the next generation of planning strategies and retirement products.

Ensombl Disclaimer
Ensombl education is intended for professional financial advisors. All discussion is limited to publicly available information and should not be interpreted as legal, professional or financial advice. Ensombl does not hold an AFS licence nor provide any financial services. Before making investment decisions, you should obtain financial advice from a qualified financial advisor.
Any information on this website does not take into account your objectives, financial situation or needs. For personal financial advice please speak to your financial adviser. Products will be issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559. PIMCO Australia Pty Ltd, ABN 54 084 280 508, AFSL 246862, provides investment management and other support services to Allianz Australia Life Insurance Limited.

Allianz Retire+ is the business name of Allianz Australia Life Insurance Limited. By using this website you agree to access this Financial Services Guide.