One of the biggest challenges faced by financial planners today is getting clients who are not prepared for retirement to face financial reality. Although many workers have saved diligently for their future, there will always be a contingent of workers who believe that their financial lives will just somehow magically work out.

The annual Retirement Confidence Study issued by the Employee Benefit Research Institute in April of 2008 contained some disturbing data. It showed that over 49% of its survey participants had less than $50,000 in retirement savings of any kind; 22% of workers and 28% of retirees said they had no savings at all. However, more than 60% of the survey respondents expressed some confidence that they would have enough money for a comfortable retirement.

Many planners understand this mindset well. Rather than analyze the possible reasons why this 60% have chosen to believe this, this article will explore a couple of possible solutions that planners can offer clients whose beliefs may be out of touch with financial reality. (Read Five Retirement-Wrecking Moves to learn of some common mistakes that can sabotage retirement plans.)

Tough Talk
Planners who are trying to get their clients to see reality may have to ask some tough questions. General inquiries about what a client plans to do after he or she retires may have to be replaced with questions regarding what he or she plans to do when the money runs out or the home is foreclosed upon. Some hard math will probably be necessary during these conversations to prove to the client what is in store for him or her. But before the planner can show a client where he or she needs to be, the issue of where the client is now must be resolved. (Three Life Events That Can Ruin Retirement Plans describes how even prepared retirees can face financial strain.)

The critical first step in this process is helping the client to understand his or her actual, rather than perceived, financial situation. Refusal by the client to see reality on this count most likely portends deeper emotional issues that must be dealt with before rational financial thinking can occur. If the client is unwilling to get the help needed to achieve this, then there is probably not much that can be done. (The Risk Of Ruin For Retirees spells out the financial factors that can negatively impact retirement savings.)

Possible Solutions
Perhaps the most obvious measure that a planner can recommend to a client who is unprepared for retirement is to simply defer Social Security benefits and continue working for a few more years. This solution is probably the most powerful, as it will help the client in three ways:

  1. The client will have fewer years from which he or she will have to draw upon retirement assets.
  2. The longer the client waits to begin drawing Social Security, the greater the benefit will be.
  3. The longer the client works, the more time and money he or she will have available to either begin or continue saving.

(Read Ten Common Questions About Social Security and How Much Social Security Will You Get? for more information on calculating benefits.)

For example, a 55-year-old who wants to retire at age 60 could instead retire at 65. If this person earns $50,000 a year, then he or she could contribute $5,000 a year to a Roth IRA until age 65. If the assets grow at 7% per year, then the Roth would have more than $69,000 tax-free at the end of the 10-year period. Between this nest egg and the increased benefit that the retiree will receive from Social Security, the shortfall may be remedied. (Read Tax Treatment Of Roth IRA Distributions for a refresher on the tax implications of this retirement savings vehicle.)

Of course, the client may also be better off taking early Social Security while continuing to work and investing that income into a tax-advantaged account. This could allow for an increased rate of savings, and perhaps the client could maximize his employer-sponsored retirement plan as well, thus taking advantage of any possible matching contributions by the employer, in addition to the catch-up contributions of the client. The timing of Social Security benefits is an issue that must be analyzed for each client on a case-by-case basis. (Read Playing Retirement Catch-Up to learn about aggressive strategies for saving for retirement.)

Of course, some clients will not be able to work for another five or 10 years, or may simply refuse to do so. In these cases, it may be more prudent to simply examine the client's strengths and weaknesses and use them to help the client to begin to adapt to their current situation. This might translate into helping the client find another job that he or she is better suited for at this point in their lives, such as one that allows him or her to work from home. Long-term part-time employment at a job that relates to a hobby or interest that they have may be another viable alternative to explore. (Read Increase Your Disposable Income for more ideas on finding new sources of revenue.)

Helping clients to face reality can be one of the most challenging and frustrating elements of financial planning, but it can also be one of the most rewarding. Have an honest conversation with clients whose skewed beliefs could leave them without adequate retirement income.