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, 2006, contained some disturbing data. It showed that 68% of its survey participants had less than $50,000 in retirement savings of any kind. Yet many of these respondents also stated that they will be ready for retirement when it comes. Rather than analyze the possible reasons why these clients have chosen to believe this, this article will explore a couple of possible solutions that planners can offer clients who fall into this dangerous category.

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 retirement may have to be replaced with more specific questions regarding what is planned 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.

But before the planner can show a client what needs to be done, the client's current position must be resolved. The critical step in this process is helping the client to understand actual financial standing versus perceived financial standing. One effective way to accomplish this is by creating two budgets to show the client: a current budget, and the future budget that the client will have to live on after retirement. A side-by-side look at these numbers can force the client to see reality in many cases. Refusal by the client to see reality in this example most likely points to 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 by the planner.

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 retirement assets will have to be drawn from.
  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 that will be available to either begin or continue the saving process.

For example, a 55 year-old who wants to retire at age 60 could instead retire at 65. If this person currently earns $50,000 a year, then the contribution could be $5,000 or more a year to a Roth IRA until age 65. If the assets grow at 7% per year, the Roth would have over $69,000 tax-free at the end of the ten-year period. Between this nest egg and the increased benefit that the retiree will receive from Social Security, the shortfall may be remedied. (Learn how much Social Security you may be entitled to, read How Much Social Security Will You Get?)

Emphasize Flexibility
The client may also be better off taking early Social Security while continuing to work and investing that income into a tax-advantaged account as well. 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 IRA 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.

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 begin to adapt to the current situation. This might translate into helping the client find another job that he or she is better suited for at this point in life, such as one that allows home-based income. Long-term part-time employment at a job that relates to a hobby or interest may be another viable alternative to explore.

In some cases, the client may benefit from selling the current residence and moving into cheaper living quarters, but this solution may present a substantial emotional hurdle, especially if the client is happy living there and had intended to live there until death. Perhaps a simpler solution would be a reverse mortgage, which allows the client to draw a monthly annuity out of the equity of a home. (For more, see our article Is A Reverse Mortgage For You?)

Helping clients 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 if you can truly help the client get to a better frame of mind and prepare them for a happy retirement. (In addition to financial planning, learn about emotional planning in Journey Through The 6 Stages Of Retirement.)