XYPN’s Michael Kitces Talks Retirement and Flipping the Psychological Switch

Retirement sometimes conjures up images of a smiling, silver-haired couple walking the beach. For others, however, it’s the fear of running out of money late in life. Others struggle to picture life after work at all. 

Michael Kitces, the self-professed financial planning nerd and co-founder of the XY Planning Network, thinks of retirement as a two-fold concept that has long been fundamental to the work of wealth management professionals. There’s the accumulation question on the one hand, he told Retirement Upside, and the spending question on the other. 

Financial advisors have mastered accumulation, as saving and investing have been the industry’s bread and butter for decades. The “decumulation challenge” is another matter entirely, one fraught with risks and little margin for error. The reality is that clients can do everything right on the front end, but still find even the best-laid retirement plans ruined by a combination of bad decisions and bad luck. Effective advisors, Kitces said, bring clients the insights, tools and tough love it takes to navigate their golden years with confidence. 

“There’s a different set of soft skills and non-financial issues that crop up with retirement,” Kitces said. “It’s everything from new retirees struggling with meaning and purpose, to fears about late-in-life bankruptcy stopping people from spending what they can afford to spend.” 

Retirement Upside sat down with Kitces to discuss key retirement trends, including the emergence of more advanced retirement income-planning tech tools.

RU: Reflecting on your career and the work you do with financial advisors, what does “retirement” mean to you from a business and client service perspective? 

MK: In a really broad sense, you can break retirement planning into two batches. First off, you have the accumulation side. The client comes to you and says, I’m a saver and I’m trying to find the right way to do it. Where do I save? How much do I need to save? How do I invest what I save and what tax-advantaged buckets should I be using? These are all questions about accumulation that advisors are used to grappling with. 

But then you have the decumulation side. At this point, the clients have hopefully got a lot of money saved and invested. They’re no longer working, so their big question is: How do I enjoy my retirement without spending too much and risking running out? How can I maximize the utility of what I have already accumulated, and how do I factor in things like Social Security and Medicare into my overall plan. This phase raises a whole different set of problems that many financial advisors are not as adept at answering, to be frank. It’s about things like timing Roth conversions, understanding the interplay of one’s taxable withdrawals with things like IRMMA surcharges. 

Retirement planning is also about tackling sequence of returns risk, which is a huge one for your clients. Facing a bear market even later on in the accumulation stage is navigable. You can put off the retirement decision for a little while and hopefully get the recovery you need to ensure your plan will work. But if you’re already retired and you’re not able or willing to go back to work, an ill-timed bear market can be devastating to the plan. 

Is the wealth management industry rising to meet the decumulation challenge, do you think, now that the baby boomer population is navigating retirement? 

What’s clear is that this industry has been very accumulation-oriented since more or less forever. It’s quite interesting, actually, because our industry basically invented the concept of the “golden years” as a motivator to inspire more people to save and invest for the future. Then the baby boomer wave came in and the industry really boomed as tremendous wealth had been created in IRAs and 401(k)s. Today, baby boomers are firmly in retirement, and the oldest Gen Xers are on the cusp of retirement, so the conversation is changing. 

Real retirement planning requires a different set of skills and different planning software.

Could you talk a little more about the development of income-planning tech? Is this a growing segment on the famous Kitces.com FinTech Map? 

I’m not sure it’s growing now, but it did really grow over the past decade as we’ve approached the peak of the baby boomer retirement wave. I don’t know that we’ll see a ton of new players enter this space in the coming years. 

What’s your assessment of whether accumulation-oriented financial advisors are developing the behavioral and emotional skills needed for retirement planning? 

On the emotional side, for a lot of us, work defines our schedules and the bulk of our social network. Retirement, leaving the workplace, can be very lonely and isolating. We’ve even seen divorce rates spike. I’ve heard people using the phrase, “I married you for life, but not for lunch every day.” As people leave work behind, material dynamics change, and not always for the better. A separate issue is that it’s very hard for a lot of people to psychologically flip the switch from saving to spending. 

I do think there’s growing awareness about these issues among advisors. If you’re working with retirees, you’re already seeing these things on a regular basis. 

Finally, how are advisors’ businesses evolving as the population is aging? Are you seeing more advisors focused on next-gen clients, or are wealthy baby boomers still the focus? Is it important to get ahead of the so-called great wealth transfer? 

I have kind of a contrarian view on that. Yes, a lot of advisors’ clients are wealthy enough that they will have a legacy. They won’t spend down their assets, and eventually that money will move to the next generation. But to be frank, a lot of firms that are good at retirement planning aren’t exactly going to be the cool, younger advisor that the next generation wants to work with. 

At this stage, we see most firms really struggle to get a positive ROI when it comes to working with the next gen vs. just staying in their lane. Look, there’s still a whole lot of people retiring every day, and life expectancy for affluent people is really strong. So the idea of not being able to rely on the baby boomer population for growth is probably more of a mid-2040s problem. We encourage firms to plan for the next three to five years, because the world is going to look so different in two decades. You can’t really plan for it.