February 22, 2012

Be Gentle or Assertive, but Stop Clients From Overspending!

As an advisor specializing in retirement planning, you know that client overspending can have significant consequences that can threaten their retirement and erode their nest eggs. Overspending refers to a continuous pattern of spending, characterized by difficulty differentiating between “wants” and “needs” that threatens a client’s retirement distribution plan. If your clients are spending at an unsustainable rate, assets like their home may be at risk, or they may take drastic steps to make ends meet without consulting you.

Clients whose spending threatens their retirement have three basic choices: 

  1. Stop overspending, 
  2. Compromise on retirement goals or 
  3. Work longer.

Because clients who are accustomed to years of overspending may not be able to entirely curb those habits, a combination of these approaches may prove necessary.

When developing their plan, you must begin the conversation about overspending. You might be uncomfortable talking to clients about overspending, but it’s crucial that you do. You could approach them with “gentle guidance,” or you may want to apply a “shock therapy” approach by being blunt about the impact of overspending. You might be also consider using both methods: start out gently and if they don’t respond take a more assertive approach.  

Here are a few ways to use an assertive approach: 

  • Hand your client a calendar and say: Please indicate the date on this calendar when you want to receive your last distribution check.
  • What are you going to do when you run out of money?
  • What will it feel like to ask a friend or family member for money so you can eat?
  • Do you think it will be easier to get a job at age 75 or to cut back a little now?
  • Which of your children are you planning to live with when your money runs out? Have you spoken to them to see if that’s going to be okay? How do you think that will impact their family?

By asking shocking questions, your clients will feel in their gut what it will be like to run out of money. Ask the questions as gently as you can, but the shock effect may be the only way to get through to some clients.

You will have the most impact on your clients who are overspending by instituting formal written spending

policies to help educate, set expectations and manage withdrawals effectively. If you encounter client resistance to suggestions for curbing spending or following a written spending policy, you may want to enlist the help of his or her accountant or estate attorney. The accountant can reinforce the differentiation between wants and needs, the importance of adhering to a spending policy and the consequences of continued overspending.

An estate attorney can help your client understand that uncontrolled spending will jeopardize plans for leaving a legacy to their heirs or charitable organizations. The key is to help the client more solidly feel the disconnect between their current behavior and their long-term goals.

Of course, some clients may view working longer or returning to work as the “safety net” if their retirement funds become uncomfortably low. That expectation may be unrealistic, particularly given uncertain employment markets and the likelihood of health issues for retirees. But for clients who cannot or will not control their spending, working longer may seem like the answer. You can help clients who make this choice by encouraging them to create a “work longer” plan to avoid forced retirement earlier than desired.

Making compromises on retirement goals will likely require helping the client prioritize expenses using a budget and sticking to a spending plan. Like any skill, creating and living within a budget requires practice, which is best undertaken before the client retires.

Understanding the reasons clients overspend and the stages they go through in changing their behavior can help you be more successful in helping clients. You should expect some resistance and relapses once clients agree to take action; just be prepared to help clients get back on track and toward a comfortable retirement.

For more information about client overspending, visit JoinSAI.com to download a copy of our white paper, “Talking to Clients about Overspending in Retirement.”

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