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This article appears in the February 2020 issue of Advisor’s Edge magazine. Subscribe to the print edition or read the articles online.

Advisors trying to anticipate clients’ portfolio withdrawal rates in retirement often rely on technical details. There are scenarios to run based on decades of market history and economic data, combined with client’s savings, debt and retirement goals.

More creative ways to predict lifespans may also become mainstream in the coming years, contributing to more personalized assumptions.

In the meantime, personality tests could be another revealing input.

In a paper published last fall, researchers from Texas Tech University applied the “big five” personality traits — which are known to affect consumer behaviour — to retirement withdrawal rates. The authors found that certain personalities — extroverts with a positive outlook, for example — are better savers than those who are more neurotic.

Withdrawal rates in retirement are commonly viewed through the life cycle hypothesis, the paper said. This theory predicts lifetime household consumption based on accumulating assets while working and spending those assets in retirement at a constant rate, according to consumption goals. The theory assumes retirees spend a set amount each year based on a percentage of assets.

That’s not how it works in practice, though. The authors pointed to research showing portfolios holding steady or even growing in retirement, rather than shrinking. This led them to consider behavioural explanations, namely the psychological factors that influence retirement spending.

Authors Sarah Asebedo and Christopher Browning analyzed psychological and personality data from more than 3,600 people in the U.S. over the age of 50 (the average age was 70). The data were from the 2012 and 2014 Health and Retirement Study, conducted by the University of Michigan and sponsored by the National Institute on Aging. The authors paired the personality data with tax data from the same participants to examine withdrawals from Individual Retirement Accounts (analogous to a TFSA in Canada).

The authors found that characteristics associated with saving and wealth accumulation, such as conscientiousness, extraversion and positive emotions, were related to lower withdrawal rates in retirement. Clients possessing characteristics associated with poorer financial decisions and lower wealth accumulation — such as agreeableness, openness, neuroticism and negative emotions — may be at greater risk of impulsive spending and depleting portfolios.

Overall, the findings were consistent with other research: those who are good at accumulating wealth demonstrate the same saving-oriented behaviour in the decumulation phase.

Advisors may benefit from adding psychological tests to client profiles, the author said. This would allow specific recommendations that recognize “the personality and psychological characteristics” influencing clients’ portfolio withdrawal behaviour.

“Identifying and understanding these relationships can inform financial planners and consumers about the characteristics and attitudes that clients bring to the relationship and that influence their behavioural choices,” the paper said. “With this insight, financial planners can more actively engage their clients, understand what triggers their financial behaviour, and guide them to more favourable long-term financial outcomes.”

“The Psychology of Portfolio Withdrawal Rates,” by Sarah Asebedo and Christopher Browning of Texas Tech University, was published online in Psychology and Aging in November 2019.

Related uses

As more firms turn to behavioural finance, personality tests are making their way into risk analysis questionnaires and the know-your-client process. For example, a TD Wealth tool asks clients to rate the accuracy of 50 short statements covering topics as varied as vocabulary, attitude to chores and comfort with strangers. It then produces a “wealth personality” that describes traits such as spontaneity, self-discipline and amenability.

The “big five” personality traits

Openness to experience: creative, imaginative, adventurous and curious; tend to be imprudent money managers

Conscientiousness: organized, thorough, hardworking and cautious; associated with prudent financial behaviour

Extroversion: outgoing, talkative and lively; associated with higher net worth and “future-oriented” financial behaviour

Agreeableness: sympathetic, caring and helpful; associated with being more financially generous, potentially putting financial goals at risk

Neuroticism: nervous, moody and not calm; associated with poor investment decisions and higher portfolio withdrawals