Clients who go to their advisors with lofty, near-term financial or retirement goals but a portfolio that doesn’t quite come close to meeting those expectations may be sitting in an unfavourable spot. However, they can benefit from a firm understanding of what led them to this point, a reality check and a clear path forward.
This occurrence is not uncommon. In fact, John Cindric, financial advisor at BlueShore Financial Credit Union in Vancouver, says that situations in which a client has plans to retire in a couple of years but hasn’t saved enough happen more often than he would like.
“It just happens to be a sad fact of life that the majority of Canadians will spend more time planning their next vacation than they do planning their retirement,” he says.
Indeed, according to Canadian Imperial Bank of Commerce’s 2019 Retirement Income poll, Canadians plan to retire at an average age of 58, but expect to continue working, in some capacity, until age 62. Yet, 74 per cent of those surveyed worry about having enough income in retirement. And almost half (47 per cent) of retirees surveyed also ended up retiring earlier than anticipated due to health, family obligations or employment changes.
When clients are hoping to retire imminently but don’t have the assets to do so, “they’re looking to understand and get a framework for what their options might be,” says Darryl Brown, an independent financial advisor at You&Yours Financial in Toronto.
In these cases, it’s important for advisors to avoid passing judgment and, instead, start by delving into what may have led the client to this point, says Diane Dekanic, a financial planner at Financial Health Management Inc. in Calgary.
“You kind of have to figure out what’s really going on there to help them through their minefield,” she says.
“I usually ask them to tell me about how they got here. Sometimes, there have been illnesses or there has been a period of job loss, or helping kids through university. Oftentimes, there’s sort of adversity,” Ms. Dekanic explains, which can also include divorce.
In other situations, she says, individuals may have focused on paying off their mortgage at the expense of saving for retirement, or they may have little equity in their house but a lot of debt and suddenly find that retirement has snuck up on them.
The back story, she says, can help inform the path forward that will achieve the most success in terms of uncovering the client’s priorities and how they have made decisions, historically.
“If their expectations are on the high side, there’s a conversation that has to be had, obviously, about understanding where those expectations came from, if they’re appropriate for the individual, and then trying to make adjustments where they may be out of line,” adds Mr. Brown.
Ultimately, refocusing clients toward more realistic goals is a two-way street, requiring trust and buy-in from clients as well as honesty and reasonable expectations on both sides in order to achieve results.
“It’s a dual responsibility. No different than a doctor. There’s a responsibility on yourself if a doctor’s telling you, ‘You have to do this to get better.’ You could decide not to take the medicine or not to have a healthier lifestyle but you cannot expect to get better,” says Mr. Cindric.
“Most people walking in want you to do magic, and there is no magic. It’s pure arithmetic,” adds Ms. Dekanic.
With clients on board, the process usually starts by taking a look at cash flow, net worth, income levels and the individual’s objectives.
Mr. Brown carries out a scenario analysis with clients, starting with a base case and certain assumptions about their current and expected household spending in retirement. He then adds in all of the potential sources of income to support their expenses, projected into the future with appropriate rates of return, to see how long their money will last and how their spending aligns.
This analysis, Mr. Brown says, gets clients asking the right questions, taking a serious look at their household expenses relative to their overall net worth and to their potential sources of income, as well as at their longevity risk.
“Once they tell us, basically, what they’re worth and what their objectives are, now a good advisor could put numbers or costs to those goals and they can project what their current financial situation will afford them and build a plan if there’s a gap between what they want to achieve in the end and what they currently have as assets and income,” says Mr. Cindric.
Ultimately, for those with lofty goals but a limited amount of income or no inheritance expected down the road, there are really only four options, says Mr. Cindric: save more, earn more, take less or wait longer.
“Usually, saving a little more and earning a little more, those are the ones that are in the client’s control, to some degree,” he explains.
For many clients, says Mr. Brown, the value of working with an advisor will be the conversation, the plan and managing expectations and risks – finding solutions that may stem primarily from household finances and focus less on outsized investment returns.
“It’s [about] taking a second look at the household expenses [and determining] what changes can be made there. [First,] is there time to pay down the mortgage as they get into retirement – perhaps a little bit faster if there are a few extra years? [The] second [option] would be [exploring] scenarios like downsizing [and the] third [option] is potentially delaying retirement,” or in some cases, phasing in retirement, he says.
For clients who may be left feeling dismayed after being given a reality check on what it will take to achieve their goals, Mr. Cindric suggests starting with more achievable short-term targets, such as putting aside a small amount each week into their registered retirement savings plans or tax-free savings accounts.
“Trying to get them to change their entire lifestyle, all of a sudden, and saying, ‘Sorry, you have to put $2,000 a month aside starting today or you won’t make it,’ well, that’s not going to happen,” he says. “You have to give them some little, realistic goal that’s measurable and doable in a short time frame. Then, that will give them that energy to keep going.”