Always on the list is save more. This would seem obvious and generally it is. Another usual suspect is anticipate life style changes you’ll undergo in retirement and plan your savings around those.

There are others, and most of us know what they are. The Society of Actuaries’ list is as follows:

• Quantify assets and net worth

• Quantify risk coverage

• Quantify assets and net worth

• Compare expenditure needs against anticipated income

• Compare amounts needed in retirement against total assets

• Categorize assets

• Relate investments to investing capabilities and portfolio size

• Keep the plan current

All of these recommendations are sound and clearly make sense. We all should undertake these various assessments, but of course we don’t. That’s the problem. When it comes to thinking about retirement, most of us are too distracted by the moment we’re in; we can’t or won’t think that far ahead, even if that far ahead is just a few years. This inability has been discussed in RetireWell in the past: We tend to misunderstand the nature of decisions in general, financial decisions in particular. Thinking of large sums of money—as in, this is what we’ll need to have for a comfortable retirement—is as difficult as planning for something five years away, let alone twenty-five.

It may be true that we all live in the future, but it’s a short term future no doubt—what we’ll have for dinner tonight or what we’ll be up to this weekend, that sort of thing.

It’s true also that the impact of doing anything for retirement is more profoundly on the plus side the sooner we do it, and that means pretty much anything. Specifically it means our deferral levels; in the most general of terms, the longer we wait to begin saving for retirement means double and triple (and more) the amount we’ll have to save to make up later. Investment results also have a major impact on final results.

The result of numbers and studies is, essentially, do something and do it soon. And that’s fine. But we need prompting to do something. There are only so many ways to motivate actions (if indeed we can motivate them at all). But these have to do largely with two actions:

·         Remind future retirees consistently that they must think about their post-work years

·         Give them, now, something to act on without any—and that means, any—effort on their part

Providing a solution to the retirement puzzle (as Klein Decisions’ K⁴ Plan Goals does) is critical to prompting action. That’s the whole point—there’s very little action required. The work has been largely done.

There are many elements to consider when thinking about and planning for retirement; some are more important than others. But what is critical is getting individuals to act and making that action as easy and understandable as possible.

For more information see Klein Decisions’ Plan Goals.

He’s not wrong. But his emphasis almost solely on deferral rates rather than portfolio allocation may be excessive. There is no doubt—as has been discussed in Retire Well in the past—that how much you save, and for how long, is a significant determinant of the financial resources you’ll have in retirement. And while this example is loaded, it’s equally true that if all or most of your deferrals end up in a fixed or stable value account, your end date accumulation will be less than it should, or could, be. And your stretch deferrals won’t mean so much.

Which gets to a point that has to do with an individual’s portfolio composition, but also with the basis for specific asset allocations—in other words, how is your ability to, first, understand risk and, second, to translate that to an effective allocation.? How does one understand risk and what it means and what it suggests you take on or avoid?

Save as much as you can, extend yourself when it comes to salary deferral—Gratton is right about that.

But max out your savings and allocate them all, or most of them , to a volatile equity fund—and then have the bad luck to retire in a down market—and all of your very intelligent deferral decisions are not going to matter so much, or will matter much less than they should.

What retirement plan participants need to understand is not the meaning of what it is to be an aggressive investor—what is that, really, by the way? They need to understand the consequences of their investment decisions, particularly on the down side.

If the market performs poorly in one year—by an appropriate and clear definition—say, it has a one-in-fifty or 2 percent chance of occurring—how much can an investor stand to lose? That’s where you perform a legitimate risk analysis: here’s what you can lose, in a dollar amount, in a really poor year in the market, in actual dollar terms, not percentages. Because that’s risk. And it’s certainly tolerance. Being moderate, whatever that means, isn’t a gauge of risk. Being willing to lose, or not, $30,000 in one bad year in the market, that is.

So, yes, deferrals are central to the retirement puzzle and to increasing the odds of a successful retirement. But so is portfolio allocation. (Also retirement age, which Retire Well has addressed in the past.) And beyond individual funds and whether one is better performing than another—beyond that is how much you are will to put at total risk of loss, in a bad year, to meet your general retirement goals.

When framed in that way, deferrals and investments have a clear and significant impact; and any long term evaluation needs to be centered around these two propositions.

For more information on Klein Decisions and its guidance and advice tools, call 919-233-6767. Or email sfoster@kleindecisions.com.

Their example, while not technically a retirement plan, could just as easily be one. And anything that nudges an individual toward a decision, if it’s for the good, is to be celebrated and used, the book argues. The nudge could be removing a barrier to action or, alternatively, creating one.

A barrier to an individual’s even participating in a retirement plan is the fact that several actions first have to be taken or initiated by the employee. This requires both knowing the action is needed, and taking it. When it comes to employee inertia, very little rates higher than a worker’s fullest participation (proper investments and “push” deferral limits) in a retirement plan.

The most encompassing nudge in this case would be for the employer to automatically enroll all eligible employees in the plan and set “stretch” deferral rates—say, from the typical 3% to 5% or more.

Studies show differing results when opt out retirement plan participation is in place, but typically the difference is substantial, often double that of opt in, where the employee must take affirmative action to participate in the plan.

The numbers are compelling. As a result, over 50% of 401(k) plans with greater than 5,000 participants contain various opt out provisions.

It is likely that with increased emphasis on employee advice, opt out provisions may grow to cover the specifics—not just in generalities—of how, and in what, a participant actually invests in the retirement plan.

Another retirement plan nudge is the Klein Decisions K⁴ Plan Goals “On Track” report. Strategy-complete and signature ready, the “On Track” report allows the participant to execute a likely more successful retirement strategy than currently exists, and without needing to supply data of any time to any one or to an online tool.

Using too few variables will result in the same non-usable strategies. It may be important to know my risk tolerance and perhaps how much I’m willing to defer into a retirement plan, but are these two variables enough from which to construct a comprehensive strategy? Not really. Too many variables, not enough: what you have is one big puzzle.

Part of this exercise has to do with one’s ability to know the specifics of his or her financial situation—how much money is where, how it is invested, etc. And also how does one want to take this knowledge, if I possess it, and apply it to a future event, my retirement, say.

Another part of this, perhaps the bigger component, is how we make decisions once we have certain information. Studies (The Wall Street Journal, “Why So Many People Can’t Make Decisions,” September 27, 2010) suggest that, in our youth, we tend to look at issues or propositions in black and white. Something is either good or bad; right or wrong. As we age, the same studies suggest, our maturity forces us more toward a middle, or grey position.

We’ve lived long enough, the hypothesis goes, to see some good, some bad in any number of outcomes. As we are making decisions we seek the ones with greater good results than bad. Which means that an outcome is not simply white or black, but preferable, by a certain amount, over a similar but different outcome. We look at decisions from a spectrum ranging from the ideal to the acceptable.

If that is the way most of us think—and most of us do think this way—then way are we using so-called retirement solutions tools that ask for yes and no, good and bad, right and wrong? We need the Klein Decisions’ patented processes that asks a retirement plan participant to look at goals and objectives—built around the only four variables needed in a retirement solution: age, income, investments, deferrals—and decide on preferences around these variables.

Ask only for the information you need. And ask about it so that individuals can rank order outcomes from most to least important. It makes all the sense in the world to ask a future retiree whether he or she would rather work longer to achieve greater income during retirement than it does to ask how much either would like to have at retirement.

You can answer the former with Klein Decisions K⁴ Plan Goals. The latter you can also answer, but the answer has no meaning and so what value is it, really?

Typically, a risk tolerance exercise will cover such issues as: investment time horizon, past investment experience and desired returns over the long term (which is often not specifically defined). Here are three typical questions for the investor to consider: What is your time horizon when you will want to make withdrawals from your portfolio?

In a cyclical bull market lasting, on-average, 36 months or more, stock prices have risen X% or more—how much do you want to gain? How diversified do you want to be?

Given these standard questions, it’s not hard to discern the “art” part of the risk tolerance exercise. Doesn’t everyone want to gain as much as possible?

What about the timing and frequency of the assessment?  In a perfect world, if a risk assessment is well constructed and the information gathered is accurate and honest, then revisiting risk tolerance would not be a frequent occurrence. If someone tests out as an aggressive investor today, he or she should, in theory, be aggressive for at least the next 3-5 years.

But that is rarely the case. Often, an investor is aggressive until the market takes a big hit—which might be days or weeks away from the assessment itself—then, just like that, that same investor is now conservative and wants to bail out of the market.  Ironically, this is the exact action that should not happen.

The flaws in this exercise are obvious. Investors don’t really think about loss in generalities, and risk levels often vary over short periods of time. They shouldn’t, perhaps, but they do.

Perhaps even more importantly, most risk evaluations tend to exist in a vacuum, further diminishing the value of their results.  The investor’s risk tolerance is assessed in the context of market returns but not the impact it will have on his or her current savings rate, potential retirement date, and desired retirement income.  Market risk is certainly important, but how does it trade off against these other goals?  All else being equal (in a vacuum) a worker may be very conservative, but he or she may be willing to accept more investment risk if it means saving less now or retiring earlier.

What’s needed are tangible—as in real numbers—measures of risk, or risk of loss, and a way to view risk in relative terms against other important retirement variables.

Suggesting—in a bad year in the market, properly defined—an investor can stand to lose, say, $30,000 from his or her account—well, that offers something real, something to make decisions around. Further, if risk of loss in a bad year in the market is that same $30,000, then how important is that relative to my retirement age, or deferrals or expected income during retirement?

The point is that this sort comprehensive risk measurement is absolutely important, crucial even.  This is a true risk assessment, not simply investment risk in a vacuum.