Reducing Retirement “Outrage” Risk With Adjustment-Based Planning And Communication

Reducing Retirement “Outrage” Risk With Adjustment-Based Planning And Communication

Financial advisors often seek to help clients understand the range of outcomes they might experience when following a given financial plan, and frequently rely on statistical probability outcomes derived from Monte Carlo simulations to report on what outcomes the future may hold. In turn, some researchers and practitioners have suggested extending the analysis even further, by accounting for related statistics, such as Magnitude of Failure and Expected Failure, to shore up the weaknesses of Probability of Failure and further enrich the breadth of information that prospective retirees have when considering the best plan to pursue. However, a focus on ever-deepening statistics alone ignores other important aspects of how retirees perceive risk.

Peter Sandman, in his book Responding to Community Outrage: Strategies for Effective Risk Communication, suggests an updated definition of risk that includes not just an objective component – “Hazard”, which measures probability and magnitude of failure – but also a subjective component, which Sandman calls “Outrage”. In Sandman’s framework, “outrage” accounts for an individual’s emotional reaction to risk. For instance, if a plan’s Magnitude of Failure is relatively low, we may think that this will calm retirees’ fears; however, including statistics based on failure in client communications may highlight low-probability-but-catastrophic and dreaded plan outcomes that are involuntary and uncontrollable. Rather than calming fears, these factors may instead amplify outrage and, therefore, heighten the perception of risk. And because Sandman finds that outrage can weigh just as much on our evaluation of risk as the hazard itself, advisors who frame their planning process and communication to reduce their clients’ negative “outrage” emotions can potentially help clients better understand what their plan’s outcomes really mean, and make better choices.

In practice, this means moving away from outrage-inducing failure-based statistics and language, and instead counseling towards dynamic adjustments over time (e.g., spending more if they can and less if they must) as circumstances change and the risk landscape evolves. This also allows advisors to reframe retirement risk in more adjustment-based and even-less-outrageous terms that emphasize what is voluntary and controllable, with a process to manage a chronic (not catastrophic) risk, focusing more on questions like: “What would need to happen to trigger an increase or decrease in income?”, “If we find ourselves in such a situation, how large would the increase or decrease be?”, and “What would we expect a household to experience in a good/bad financial environment when following this plan?”

Ultimately, the language we use to describe risky outcomes – and the potential “outrage” it can induce – plays an essential role in the conversation around retirement risk, as much as discussing the hazards (objective risks) of retirement itself. By moving away from the concepts and language of Failure and Success, the financial advisor can lessen the emotional reaction clients may have in response to their financial plan. Similarly, when advisors present adjustments as a natural and necessary part of the plan, clients will be more likely to accept and proactively implement the changes that may be required for a successful plan outcome. By adopting Sandman’s updated definition of risk, and accounting for both objective Hazard and the more subjective Outrage components of risk, advisors may find that clients are not only more open to having conversations about their financial plans but also more willing to listen to their advisors, follow their financial plans, and make changes when action is needed!

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