In 1955, psychologists Joseph Luft and Harrington Ingham created a technique to help their patients better understand how they see themselves and others see them. They called it the “Johari Window,” a combination of their first names.Alliance for Lifetime Income to educate consumers and financial advisors about protected lifetime income in retirement.Even though the technique was created for different purposes, the Johari Window has a lot to teach us about retirement planning. It also helps to explain why 24 leading financial services companies recently launched the
The Johari Window2
The Johari Window asks an individual to choose adjectives that describe his or her personality. The individual’s friends, family, and co-workers also choose adjectives to describe the person’s personality. Then, the two lists are compared and the results divided into four cells (like panes of glass in a four-panel window):
- “known to others/known to self” – words appear on both sets of lists;
- “known to others/unknown to self” – words appear on others’ lists, but not the subject’s;
- “known to self/unknown to others” – words appear on the subject’s list, but not others’; and
- “unknown to self/unknown to others” – words appear on neither list.
Comparisons of these four cells allow the individual to more fully understand perceptions of his identity and to assess whether there is any disconnect between the individual’s self-perceptions and his presentation to the world. A disconnect may be a root cause of anxiety, social discomfort, interpersonal conflict, or worse.
A Window into Retirement Planning
Retirement planning also is full of known/knowns, known/unknowns, and unknown/unknowns with potentially important consequences. The known/knowns may be obvious. For example, you know how much money is in your retirement savings accounts, and how much equity you have in your home. You know (or can find out on www.socialsecurity.gov) roughly the amount of Social Security benefits you will receive each month if you retire at various ages. You know how much you currently spend over the course of a month or a year. And some people know the age at which they plan to retire.
There are also known/unknowns. You know that you don’t know how long you will live. My father died at age 76; my mother is alive at age 94. How long will I live? You know that you don’t know if you will become seriously ill or experience a disability. You know that you don’t know if financial disaster or a divorce will force one of your children or another family member to ask for help. You don’t know whether the value of your investments will rise or fall, especially in the months leading up to your planned retirement date. Think about the 55-year-old who planned for her retirement in 1997. She did not know that financial markets would collapse, and drag her retirement savings down with them, when she turned 65 in 2007.
And there are unknown/unknowns. You can’t necessarily name them because, well, they are unknown. But they may be looming out there somewhere.
"For many Americans, protected lifetime income can be an effective means to manage the risks associated with your retirement. In the process, it can ameliorate or even eliminate some of your retirement worries."
Known Unknowns, Control, Uncertainty, and Risk
We can plan for the known/knowns and thereby control the outcomes that flow from them. If you know that you don’t have enough saved to continue your pre-retirement lifestyle, for example, you may be able to make choices that will improve your situation. You might work past your planned retirement date, retire in a town or state with a lower cost of living, or save more while still working, for example. You may not like all of these choices (or any of them), and finances or health may deprive you of some or all choices. Nonetheless, most of us have some control, and control brings a degree of confidence and comfort.
The known/unknowns is where confidence breaks down and worries fester. There are two reasons. First, you cannot control the unknowns, even though you know about them. Knowing you lack control is, to say the least, disconcerting and worrisome. That’s why you don’t worry as much about unknown/unknowns; you don’t know there is reason to worry.
Second, the potential outcomes resulting from known/unknowns are uncertain. For example, I might get sick in my 80s, and I might not. If I get sick, bad outcomes could hit my family and me. Our outcomes will be better if I don’t get sick, but I simply don’t know what will happen with my health 25 or more years down the road. This uncertainty over outcomes defines risk, and risk can cause worry.
On the other hand, understanding risk suggests a model for a strategy. When you know you face an important risk, insurance often can help to protect you against potential bad outcomes. For example, I can help guard against the bad outcomes of getting sick in my 80s, in part, by enrolling in Medicare, buying an insurance policy that fills the gaps in Medicare coverage, and perhaps buying long-term care insurance. I may still get sick, but my illness should not bankrupt my family and leave me with inadequate care that hastens my death or leaves me miserable.
That’s where protected lifetime income comes in. For many Americans, it can be an effective means to manage the risks associated with your retirement. In the process, it can ameliorate or even eliminate some of your retirement worries.
How Protected Lifetime Income Addresses the Risks of Known/Unknowns
Protected lifetime income operates surprisingly simply: you buy an annuity and, whenever you decide to start the income flowing, you get a check every month for the rest of your life. The amount of money in the checks will not decrease during your lifetime. In fact, that amount may increase over time.
It should be apparent how protected lifetime income responds to several of the important known/unknowns of retirement. You know that you don’t know when you are going to die, and so you worry about outliving your retirement savings? Your annuity checks will continue regardless of how long you live. Risk eliminated. Worry reduced.
You know that you don’t know how markets will perform, and so you worry your retirement investments will lose value, especially just before your retirement date? Although annuities can still fluctuate and lose value, many annuities offer “guarantees†” that the amount of income you will get from your retirement investments will not decline regardless of how the markets perform. It’s like insurance against market instability. Risk eliminated. Worry reduced.
You know that you don’t know whether you have enough retirement savings to sustain your lifestyle, so you worry your personal finances will drop off a cliff when you retire? Annuities’ guarantees allow you to invest more aggressively. For example, you might choose equities, which offer higher risk and higher return, rather than Treasury notes, which are lower risk and lower return, to grow your retirement savings. You know that you don’t know whether there will be some unexpected family event that requires you to spend from your retirement savings, and so you worry about going off the financial cliff from a different angle? With protected lifetime income, you know the income you will receive each month for the rest of your life, so you know how much money you can spare from your other savings. Risks reduced. Worries reduced.
For these reasons and more, protected lifetime income should be included in the retirement planning discussions of a large majority of Americans with savings and/or assets. That’s the mission of the Alliance for Lifetime Income: to educate consumers and financial advisors about protected lifetime income so it becomes an ordinary part of retirement planning. The Alliance provides consumers and financial advisors with the educational resources, tools, and insights they can use to build plans that include protected retirement income. You can learn more by reviewing the Alliance’s web site, signing up for its email list, and connecting on Twitter, Facebook, and LinkedIn.
Why is the Alliance focusing on financial planners as well as consumers? Because, just as the Johari Window assumes that your perceptions and others’ perceptions of your personal identity may differ, your perceptions of your goals, interests, and retirement financial plans may differ from the perceptions of a knowledgeable professional. At a minimum, the financial planner should help you understand how your goals and interests can be best served by different retirement investment products and strategies. In the best relationships, however, the financial planner helps you assess all the factors in your life, the markets, and the economy that a smart retirement plan should take into account. To learn about questions you should ask to find the right financial planner, see my article Six Starter Steps to Avoid a Personal Retirement Crisis on the Studio and this checklist from the Alliance.
Protected lifetime income is not a winning lottery ticket. It will be right for some people, and not for others. But regardless of your current perception of your retirement plan, it’s worth considering protected lifetime income.
*What is an annuity?
Annuities are long-term, tax-deferred investments designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
Annuities are not for everyone. And, it’s important to remember that these products are meant to be long-term investments designed for retirement, so there are restrictions in place to discourage you from withdrawing all of your money at once or taking withdrawals before age 59 1/2. However, most annuities do allow for exceptions based on specific circumstances such as a terminal illness or other emergencies.
† Guarantees are backed by the claims paying ability of the issuing insurance company.
‡ Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.