Helping Clients Close the Retirement Gap

Wednesday, November 2nd, 2011

“How do I close the gap on hit­ting my retire­ment goals?”

If you’re meet­ing with clients in their 40s and 50s, chances are you’re run into that ques­tion. Weak equity mar­kets over the past decade, low inter­est rates and a new con­sen­sus on a muted out­look for future returns means that some clients who five years ago were on track to retire at 60 or 62 can no longer be con­fi­dent about doing so.

It’s here that advi­sors can add real value, as you’re able to engage clients fac­ing a short­fall in a dis­cus­sion about the six options avail­able to them:

• Option 1: Work longer
• Option 2: Work part time after retirement
• Option 3: Increase the risk in asset mix before and dur­ing retire­ment to increase poten­tial returns
• Option 4: Change retire­ment plans; down­size houses ear­lier or cut back on spending
• Option 5: Reduce spend­ing now and invest more lead­ing up to retirement
• Option 6: Buy lot­tery tickets

Set­ting aside option 6, every solu­tion to clos­ing the gap en route to retire­ment will likely include some com­bi­na­tion of these alter­na­tives. And it’s here that finan­cial advi­sors can add real value; clar­i­fy­ing alter­na­tives and help­ing clients under­stand the trade­offs avail­able to them.

His­tor­i­cally, some advi­sors have been reluc­tant to get into con­ver­sa­tions about client bud­get­ing and spend­ing, focus­ing on the invest­ment side of the equa­tion. That may have worked in the past, but for clients look­ing to close a short­fall in retire­ment plans, you can’t ignore the impact of spend­ing, both now and in retire­ment. As part of that, an inter­ac­tive new web site gives clients the tools to quan­tify and man­age those reductions.

Quan­ti­fy­ing “the latte effect”

Most advi­sors have heard of “the latte effect;” the big impact that a small reduc­tion in non-essential spend­ing make on retire­ment portfolios.

And while many clients are vaguely aware of this, the chal­lenge is get­ting them to take action.

Iner­tia is an incred­i­bly pow­er­ful bar­rier to change. Telling peo­ple they need to alter behav­iour doesn’t work; they have to dis­cover this for them­selves. That’s why an inter­ac­tive sav­ings cal­cu­la­tor on a web­site called bills​.com (http://​www​.bills​.com/​w​a​y​s​-​t​o​-​s​a​ve/) offers an effec­tive way to show clients what hap­pens if they reduce spending.

There are three sim­ple steps. First, clients choose the return that they’ll earn on their sav­ings from 1% to 10%. Next, they select the length of time for which these sav­ings will be main­tained; any­where from 1 year to 30 years.

Finally, the site allows peo­ple to look at 20 ways they can cut back. From daily cof­fees and snacks to bot­tled water, gym mem­ber­ships, lot­tery tick­ets, enter­tain­ment and din­ing out. You pick a cat­e­gory and how much you think could be cut. Depend­ing on the expen­di­ture, the sav­ings are shown on a weekly or monthly basis. As peo­ple go through the dif­fer­ent cat­e­gories, there is a run­ning tally of how much bet­ter off they’ll be as a result.

Clients could go through this process in two dif­fer­ent ways. One is to go through each cat­e­gory look­ing for sav­ings and see where they end up. The other is to set a monthly sav­ings goal and then go through each cat­e­gory look­ing for ways to get to that goal.

Help­ing clients stick to their plan

Imag­ine that a 45 year old cou­ple chooses a 20 year time­frame and a 6% return on the amount they save, based on an all-equity port­fo­lio of qual­ity div­i­dend stocks. Hav­ing done that, they decide to elim­i­nate their two daily lattes while at work. At $4 each, that adds up to $80 a week that they put into a TFSA. By doing this alone, in 20 years they end up with an extra $160,000 in retire­ment sav­ings; at a 4% with­drawal rate, that works out to an extra $125 a week to spend in retirement.

Or let’s sup­pose they iden­tify weekly sav­ings of $200, adding up to $10,400 annu­ally. Of this amount, half goes to fund quar­terly long week­end mini-vacations in nearby cities, the other half goes into a TFSA for retirement.

After 20 years, that $100 a week into their retire­ment fund accu­mu­lates to just over $200,000. One way to trans­late this into con­crete terms is to tell clients that at a con­ser­v­a­tive 4% with­drawal rate, set­ting aside an extra $100 a week for the next 20 years results in an extra $150 a week for the dura­tion of their retire­ment, indexed for inflation.

As for the other half of their sav­ings that’s allo­cated to quar­terly mini-vacations, this is dri­ven by two pieces of behav­ioural research.

One relates to the need for short term rein­force­ment to main­tain dis­ci­pline. Quite sim­ply, most peo­ple need more than the prospect of a more com­fort­able retire­ment in 20 years time to sus­tain short term sac­ri­fice. That quar­terly mini-vacation pro­vides reg­u­lar imme­di­ate rewards en route to that long term goal.

The other research is on the pay­off from hol­i­days, some­thing I’ve writ­ten about before. There are three ways that peo­ple get a lift from vaca­tions; the antic­i­pa­tion lead­ing up to them, the enjoy­ment while on hol­i­day and the pos­i­tive mem­o­ries after­wards. What’s fas­ci­nat­ing is that as a gen­eral rule, the most pow­er­ful of these three ben­e­fits from vaca­tions is the antic­i­pa­tion in advance of get­ting away.

The con­clu­sion is very sim­ple: In addi­tion to tak­ing peri­odic longer breaks to decom­press and recharge, we’d all be bet­ter off if we sched­uled more fre­quent, shorter hol­i­days, so that we always have some­thing com­ing up to look for­ward to. That’s true for us and it’s just as true for our clients.

A last obser­va­tion on this site: Many clients who are fairly fru­gal or who don’t have to be con­cerned about their retire­ment still worry about the “live for today” mind­set of their chil­dren. The site can be a use­ful resource for your clients, but can be even more effec­tive if they can per­suade their kids to spend some time with it.

Note: The extra dol­lars at retire­ment are actu­ally greater than shown on the site, since the cost of those lattes and gym mem­ber­ships will go up with infla­tion. Off­set­ting that, the dol­lar amount the site shows clients end­ing up with down the road is in today’s dol­lars and will have lost pur­chas­ing power. In the inter­est of sim­plic­ity, I sug­gest you set this aside when hav­ing this con­ver­sa­tion with clients.

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Tags: 40s, 50s, Asset Mix, Closing The Gap, Consensus, Conversations, Financial Advisors, Future Returns, Gap, Inertia, Investment Side, Low Interest Rates, Option 1, Retirement Goals, Retirement Option, Retirement Plans, Retirement Portfolios, Shortfall, Tradeoffs, Work Part Time
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Do You Need a Code of Conduct?

Tuesday, October 19th, 2010

Recently, I got an email from an advi­sor ask­ing for sug­ges­tions on how to deal with clients who sold some or all of their port­fo­lio near the 2008-lows.

More specif­i­cally, he wanted to know if it’s worth­while edu­cat­ing these clients of where they would be had they not sold out? Or does he risk fur­ther dam­ag­ing their ego and what remains of the rela­tion­ship?

He also asked for my thoughts on deal­ing with three types of per­son­al­i­ties he has seen emerge among his clients:

1) Almost a per­ma­nent “pes­simism” about the world and mar­kets will crash again (not sure he wants to keep these ones)

2) Acknowl­edge­ment that it was not a good time to sell and con­sid­er­ing re-entry in the mar­kets    (these make him slightly ner­vous since there will be drops in the future)

3) Those who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates.

Clients who sold at the bottom

For clients who bailed out in late 2008 or early 2009, I do think it’s worth approach­ing them about sit­ting down and revis­it­ing where they stand.

The key is to make this con­ver­sa­tion forward-looking, focus­ing on the oppor­tu­ni­ties today – there’s noth­ing to be gained by going back over missed oppor­tu­ni­ties.

So it comes down to mak­ing an assess­ment of today’s val­u­a­tions, clients’ time frames and abil­ity to with­stand mar­ket down­turns – and also the rate of return they need to achieve their goals.

As for clients who are still appre­hen­sive, many investors are spooked by all the neg­a­tive head­lines in the media.

Here you need third party sup­port. On my web­site I have posted arti­cles refer­ring to pos­i­tive com­ments about prospects for the period ahead by War­ren Buf­fett, Steve Ballmer and Jeff Immelt at a con­fer­ence in mid Sep­tem­ber.

And I also have an inter­view with Jeremy Siegel of Whar­ton, con­sid­ered today’s lead­ing stock mar­ket his­to­rian, that I recorded in July - “The case for under­val­ued mar­kets” – that is still rel­e­vant today.

When talk­ing to clients about reen­ter­ing the mar­ket, assum­ing you are mod­estly pos­i­tive in the mid term as I am, you could rec­om­mend phas­ing their shift from cash to equity in over a twelve month period, invest­ing the funds in two or three stages .

This feels less risky and is more com­fort­able for many clients and also sends the pos­i­tive sig­nal that you’re not in a rush to get their money invested and gen­er­at­ing rev­enue for you.

Three trou­ble­some client profiles

For clients who are “almost per­ma­nently pes­simistic” about the world and mar­kets will crash again, I agree that it’s gen­er­ally not pro­duc­tive keep­ing “per­ma­nently  pes­simistic” clients – they’re unlikely to change and will likely sap your own energy with lim­ited return.

For clients who acknowl­edge that it was not a good time to sell and are con­sid­er­ing re-entry in the mar­kets , but make this advi­sor slightly ner­vous since there will be drops in the future, these cases I wouldn’t be as hard on.

Lots of peo­ple (includ­ing advi­sors) got spooked in 2008 and early 2009, it truly did feel like we might be look­ing into the abyss. In these cases, you need to have a can­did con­ver­sa­tion about the cer­tainty of con­tin­ued volatil­ity – and have a dis­cus­sion about their abil­ity to with­stand this.

Finally, for clients who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates, low rates are obvi­ously a huge issue, espe­cially for seniors.

In some of these cases, advi­sors are going to have to broaden their hori­zons, look­ing at mov­ing out on the volatil­ity curve, putting part of client port­fo­lios in solu­tions like invest­ment grade cor­po­rate bond funds, emerg­ing mar­ket bond funds (cur­rently yield­ing 6%), REITs and bank alter­na­tive lend­ing firms.

You obvi­ously need to talk to clients about the greater risk of these alter­na­tives com­pared to Gov­ern­ment bonds – but even if it takes more time to have these con­ver­sa­tions, they’re still going to be essen­tial in many cases.

    Lat­est Advi­so­r­An­a­lyst Prac­tice Growth Sto­ries

Tags: Acknowledgement, Code Of Conduct, Ego, Good Time, Historian, Jeff Immelt, Jeremy Siegel, Low Interest Rates, Lows, Negative Headlines, Pessimism, Prospects, Rate Of Return, Steve Ballmer, Stock Market, Time Frames, Types Of Personalities, Valuations, Warren Buffett, Wharton
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Navigating Post-Financial-Meltdown Reviews

Tuesday, October 19th, 2010

Recently, I got an email from an advi­sor ask­ing for sug­ges­tions on how to deal with clients who sold some or all of their port­fo­lio near the 2008-lows.

More specif­i­cally, he wanted to know if it’s worth­while edu­cat­ing these clients of where they would be had they not sold out? Or does he risk fur­ther dam­ag­ing their ego and what remains of the rela­tion­ship?

He also asked for my thoughts on deal­ing with three types of per­son­al­i­ties he has seen emerge among his clients:

1) Almost a per­ma­nent “pes­simism” about the world and mar­kets will crash again (not sure he wants to keep these ones)

2) Acknowl­edge­ment that it was not a good time to sell and con­sid­er­ing re-entry in the mar­kets    (these make him slightly ner­vous since there will be drops in the future)

3) Those who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates.

Clients who sold at the bottom

For clients who bailed out in late 2008 or early 2009, I do think it’s worth approach­ing them about sit­ting down and revis­it­ing where they stand.

The key is to make this con­ver­sa­tion forward-looking, focus­ing on the oppor­tu­ni­ties today – there’s noth­ing to be gained by going back over missed oppor­tu­ni­ties.

So it comes down to mak­ing an assess­ment of today’s val­u­a­tions, clients’ time frames and abil­ity to with­stand mar­ket down­turns – and also the rate of return they need to achieve their goals.

As for clients who are still appre­hen­sive, many investors are spooked by all the neg­a­tive head­lines in the media.

Here you need third party sup­port. On my web­site I have posted arti­cles refer­ring to pos­i­tive com­ments about prospects for the period ahead by War­ren Buf­fett, Steve Ballmer and Jeff Immelt at a con­fer­ence in mid Sep­tem­ber.

And I also have an inter­view with Jeremy Siegel of Whar­ton, con­sid­ered today’s lead­ing stock mar­ket his­to­rian, that I recorded in July - “The case for under­val­ued mar­kets” – that is still rel­e­vant today.

When talk­ing to clients about reen­ter­ing the mar­ket, assum­ing you are mod­estly pos­i­tive in the mid term as I am, you could rec­om­mend phas­ing their shift from cash to equity in over a twelve month period, invest­ing the funds in two or three stages .

This feels less risky and is more com­fort­able for many clients and also sends the pos­i­tive sig­nal that you’re not in a rush to get their money invested and gen­er­at­ing rev­enue for you.

Three trou­ble­some client profiles

For clients who are “almost per­ma­nently pes­simistic” about the world and mar­kets will crash again, I agree that it’s gen­er­ally not pro­duc­tive keep­ing “per­ma­nently  pes­simistic” clients – they’re unlikely to change and will likely sap your own energy with lim­ited return.

For clients who acknowl­edge that it was not a good time to sell and are con­sid­er­ing re-entry in the mar­kets , but make this advi­sor slightly ner­vous since there will be drops in the future, these cases I wouldn’t be as hard on.

Lots of peo­ple (includ­ing advi­sors) got spooked in 2008 and early 2009, it truly did feel like we might be look­ing into the abyss. In these cases, you need to have a can­did con­ver­sa­tion about the cer­tainty of con­tin­ued volatil­ity – and have a dis­cus­sion about their abil­ity to with­stand this.

Finally, for clients who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates, low rates are obvi­ously a huge issue, espe­cially for seniors.

In some of these cases, advi­sors are going to have to broaden their hori­zons, look­ing at mov­ing out on the volatil­ity curve, putting part of client port­fo­lios in solu­tions like invest­ment grade cor­po­rate bond funds, emerg­ing mar­ket bond funds (cur­rently yield­ing 6%), REITs and bank alter­na­tive lend­ing firms.

You obvi­ously need to talk to clients about the greater risk of these alter­na­tives com­pared to Gov­ern­ment bonds – but even if it takes more time to have these con­ver­sa­tions, they’re still going to be essen­tial in many cases.

    Lat­est Advi­so­r­An­a­lyst Prac­tice Growth Sto­ries

Tags: Acknowledgement, Ego, Financial Meltdown, Good Time, Historian, Jeff Immelt, Jeremy Siegel, Low Interest Rates, Lows, Negative Headlines, Pessimism, Prospects, Rate Of Return, Steve Ballmer, Stock Market, Time Frames, Types Of Personalities, Valuations, Warren Buffett, Wharton
Posted in Dan Richards | Comments Off