Anne Lester, retirement expert, on how Millennials and young people are saving the wrong way and how they can fix it

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Toward the end of 2020, Anne Lester finally practiced what she spent three decades preaching: She retired.

The senior J.P. Morgan executive — she was most recently head of retirement solutions for the asset management arm of the giant bank, where she worked for 28 years — first had to sit down and calculate her household cash flow, to make sure that, once she gave up her steady Wall Street paycheck, she would still be able to make mortgage payments on her home. (She would, the math showed, so she felt safe retiring.)

It’s how advisors should think about retirement for their clients, she says: do the research, then fight the natural urge to let your brain’s defenses hinder your investing goals.

“The most productive thing advisors could do is help people understand that they shouldn’t be anchoring on the last 10 to 15 years of returns as normal,” Lester said.

Lester is now writing a book that boils down what she learned, and told clients, all these years of spinning economic data into J.P. Morgan’s research. She spoke with Financial Planning about what advisors should be telling clients now. This interview is lightly edited and condensed for clarity.

Financial Planning: What is your book about?

Anne Lester: I’m working on a book aimed at Gen Zs and Millennials, aiming at helping them to be better savers and get ready for retirement. It’s not so much that they’re doing things wrong as they’re not doing everything right that they should. It’s the behavioral wiring that’s getting in the way. It goes to people’s feelings of fear and inadequacy and shame about how they should be doing better.

I went through my own troubles saving in my 20s as well, until I started doing the research that led to the creation of the target date funds at J.P. Morgan. I realized it wasn’t that I was stupid — it was behavioral, how my brain was wired.

All of us, almost regardless of how much we are making, think there isn’t enough money. It’s easy to get caught up in the hedonic treadmill of lifestyle creep and to start defining things as what you need vs. what you want. So many families just don’t talk about money. It’s awkward, it’s scary, parents feel shame about how they’re doing.

FP: What advice would you give young people about retirement?

AL: Saving is such basic advice. If you start when you’re first working, and you have a regular income, you really can start. People underestimate the power of very small steps and how it snowballs over time into something very significant. People need to forgive themselves.

FP: How did you make the leap to retire yourself?

AL: I loved my job, but I was just ready to do something else. Managing cash flow is everything. I was thinking about myself and how I wrestled with stepping down from a very well-compensated job into something with less certainty. It’s a leap of faith that I’ve thought through the cash flow correctly. Refinanced the mortgage to make the payments as low as possible. From a cash flow perspective, if the book doesn’t sell, if I earn no more money, what is the absolute worst-case scenario? What can we cobble together? That to me is the key because there is no certainty. It would also be a shame to wait until you have 105% certainty on all the Monte Carlo simulations.

It’s also important to keep your skills up. How relevant are your skills? How able are you to replicate your income level at a rate that won’t make you impoverished?

FP: It’s always interesting to hear about the FIRE (“Financially independent, retire early”) movement and the idea of retiring very early. What do you think of that?

AL: The FIRE movement asks: can I let go of the security blanket of a full-time job and go to more of a self-employment situation? Many Millennials say to me, “I’m not eating rice and beans! I don’t want that lifestyle!”

If you’re pretty certain you can replicate your income, and you’re in the kind of job market we have now, then yes, it could work. If you do plan to leave your job, one thing to note is that the size of your emergency savings needs to be inversely proportional to your certainty of income. My younger son wants to be a musician; you need a lot of emergency savings. Think about the size of your cushion, and the certainty you need to approach this stuff, and your future prospects; the economy is always a wild card.

FP: How should people think about the amount of money they actually need to achieve the lifestyle they want in retirement?

AL: People underestimate their ability to renormalize. When it comes to money, think about, what’s your definition of failure? Here’s mine: My husband and I moved to Milan many years ago. He was working, and I wasn’t. Every week we would have a conversation about whether we could afford to buy meat or an English-language newspaper. Once I bought a chicken at the supermarket, marked “tradizionale” in Italian. I didn’t realize that meant it was plucked, but still had the head and feet on! It had to be cleaned. I took out my old “Joy of Cooking” and it had a whole section on game birds, and I followed the instructions. I don’t ever want to be that poor again. Similarly, for travel, I don’t have to travel the way a J.P. Morgan executive travels, but I do like to have my own bathroom.

FP: What retirement strategies should advisors be looking at now?

AL: If you understand your risk, just do what you do. People get way too concerned about trying to maximize pennies on the margin and don’t pay enough attention to, “Is that a steamroller coming down the street toward me?” For individuals, you should not be messing around trying to time the market. That’s a recipe for disaster. I look back at what happened in 2008 and how many people sold at the absolute worst time and never got back in, or barely, and that’s heartbreaking.

Advisors in general are better today at focusing your clients on staying the course, if you’ve got the risk level right. It feels now more likely that we are in for low, boring, substandard inflation-ish returns for a while, and not returning 2008 levels of returns for a while. Advisors should be having conversations with their clients about what is a normal environment to be expecting for returns, and if we’ve had some fabulous years, then we’re likely to have some lean years as well.

The other thing I think people could get comfortable with is, “How am I going to spend some of my portfolio?” Some retirees anchor on required minimum distributions (RMDs) — because it’s a number someone told them — but sometimes you should spend more. People are sitting on enormous gains. Maybe this is time to think about filling that year or two or three up so you can ride through whatever happens with some certainty. At some point returns are going to go down from where they are today. In the context of having had these blowout growth years, you can do just fine if there are a few down years. There will be paper losses. It’s OK.

The most productive thing advisors could do is help people understand that they shouldn’t be anchoring on the last 10 to 15 years of returns as normal. They should be trying to help their clients see that with graphs. Also, having the conversation about how you can feel safe, with cash flow projections, so that you don’t feel like you have to sell. Don’t freak out! Rebalance and carry on.

FP: What asset classes could work in this inflationary environment?

AL: Real estate is a really good one. Commercial real estate held up pretty well. It might be a good time to diversify. As the economy transitions a little bit and we figure out what cities look like, there will be some opportunities there. I’m sure commercial property prices have fallen. Eventually residential is going to correct and nonresidential will become more attractive with an eye toward inflation. Real assets, commodities, emerging markets and small cap stocks: the higher beta stocks are more sensitive to inflation. If you haven’t been rebalancing because you’ve been riding the U.S. stock market, now may be the time to do it.