Respect the client's mental hierarchy to win retirement plans

The retiree who says her biggest fear is outliving her money and then passes on the annuity that would eliminate exactly that outcome is acting out a mental accounting hierarchy, one that puts liquid current assets at the top.

Michael Kitces, head of planning strategy at Focus Partners Wealth, reviews that research on his Nerd's Eye View blog, synthesizing work showing that money is fungible but our thinking about it is not. We mentally sort dollars into separate buckets for current income, current assets, and assets reserved for future income, a habit that helps explain why retirement income 'bucketing strategies' are so popular, whether segmented by time horizon (short, intermediate, long) or by spending type (essential vs. discretionary).

There is, however, an ordering to those buckets. Kitces describes the hierarchy as current income needs first, then current assets, and finally savings for future income, ideally with some upside potential on the far end—an order that explains why certain retirement products get embraced and others shunned.

Consider the annuitization paradox: retirees consistently name outliving their assets as their biggest fear, and a lifetime income annuity can guarantee that will never happen, yet annuities remain deeply unpopular. Buying an annuity feels like surrendering the current-assets bucket in exchange for a future-income promise; even when the trade is actuarially sound, it violates the client's mental priority ordering. The client is refusing to dismantle a higher-priority bucket to fund a lower-priority one; the guarantee itself isn't the problem.

Guaranteed living benefit riders on variable annuities hold their appeal for the same reason, even when their guarantees are mechanically inferior to a stand-alone annuity: the GLB lets the client keep the current-assets bucket fully intact while securing a future income promise. The research suggests satisfaction, not expected value alone, determines whether a strategy gets adopted.

The hierarchy exacts a price. Kitces notes that retirees who want current income, future income, and liquid current assets may feel compelled to save more than they actually need even with no desire to leave a legacy. The research he cites finds cash on hand is directly and positively related to self-reported well-being and life satisfaction regardless of financial need. A client can therefore have a perfectly funded plan and still feel constrained by not having enough—the feeling is real even when the mathematics says otherwise.

Rather than trying to talk the client out of the buckets, the advisor should design the plan inside them. That starts by making the current-income bucket explicit and adequately funded and continues with defending the current-assets bucket even when the analyst inside you wants to put that cash to work. It ends with building the future-income bucket in a way the client can see and touch, not just in an abstract projection.

In practical terms, an annuity belongs in the future-income bucket, not the current-assets bucket: a client who can point to a specific pool of money earmarked for the next two to three years of living expenses will be far more willing to consider a product that pays out decades from now. The same logic governs the order of operations in a financial plan—show the client that current income is covered first, current assets are then set aside, and only then should the remaining surplus flow toward future income guarantees.

The judgment that emerges from this research is a direct challenge to the product-centric sales model: an advisor who designs a retirement plan around the client's mental hierarchy, accepting that the client will demand a cash cushion and pay for psychological satisfaction, is more likely to see the plan adopted than the advisor who builds the mathematically optimal income stream. A plan that sits on the shelf, even if superior on paper, is worth far less than one that provides slightly less but actually gets implemented.

There is still a place for challenge: an advisor should test whether the liquid-assets bucket is sized appropriately and whether client anxiety is driving an unnecessarily large cushion, because the research suggests the feeling of 'enough' is a planning input in its own right, not a byproduct of a healthy balance sheet. As we wrote when Kitces and Carl Richards took up the subject on their podcast, the client's gut is financial data. The hierarchy of retirement needs is that argument in its most practical form.