How do you tell someone they're screwed?

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Nov 10, 2009 3:59 pm

I've been working on a retirement projection for some clients and no matter how I try to look at it, it always ends up the same.  They run out of money.  Mostly because of some choices they're making right now.  They're spending almost $40K a year on mortgages (one primary residence, one HEL on the primary, and a rental house).  According to my calculations I'm going to have to pull about 9% off the portfolio for the next two years before I can back it off to a more reasonable percentage.  And that's hoping that they can sell their houses and consolidate into one in another state.  If they can't sell their homes I'll have to pull that high percentage off longer.  


Anyway, I'm just curious how you folks would handle telling them that they're screwed.  If they live just as long as the default expectancies say, they run out of money about 4 years before the wife passes away.  So, do you tell your clients that we can hope for the best, or do you tell them they have to cut out things like movies and dinner out or visiting their kids in different states and vacations ($8500 a year projection according to them)?  Anyone got a good way to share this news with a client?
Nov 10, 2009 4:06 pm

Most clients who are screwed know beforehand they are screwed.  Not once have we gone through the retirement scenario and a client has been shocked that their small pittance and social security wouldn't last them 35-40 years.  Don't tell them to cut out stuff.  Tell them to add savings.  You don't need to go through a monthly budget and say "Ok, take out cable and that will add $120 to your monthly savings.  Ohh look here, that $400 of entertainment will have to become $200."  Look at them and say "You are currently saving $800 a month for retirement.  You need to add an extra $800 to this.  Where this will come from I don't know, and I'm not saying starting tomorrow you need to do this.  But we can start slow, add $150 to your savings for the next few months, then add an extra $150 and so forth.  By the end of next year you will be saving the target amount.  Sound good?"

Nov 10, 2009 4:06 pm

Simple.  Show them the projection and let them make their own judgements.  "OK, based on our projections and what you are currently spending, I was pleased to see that your assets will last until age 76.  Hopefully the markets will behave and we won't run out any sooner.  But with some good luck, you have another 11 years to go!"

Nov 10, 2009 4:14 pm

I advise them to start eating bacon....

 
Why not just show them.. either they know and they need to be told or they don't know and they need you..
 
"Based on this and your current spending habits you will run out of money at 76.. We have two choices, 1. Spend less(not always the best option, because most of the time it doesn't work)... 2. Retire  later..  3. Stop using American Funds
Nov 10, 2009 4:19 pm

Sell the husband some life insurance and one approved, encourage his to pick up smoking. 


That is a hard topic and I've had those meetings this past year, especially with assets not really growing like we had hoped the past 10 years.  All you can do is run those projections, show them, and explain to them as is, you're looking at some issues down the road.  If they're already pulling money out and don't want to decrease it, I'd have them sign a letter saying you showed them the projections and the risks,etc. to cover your tail. 
 
Nov 10, 2009 4:23 pm

Document the hell out of your meetings / correspondence with them - ecspecially if they don't follow your advice.

Nov 10, 2009 5:02 pm
Wet_Blanket:

Document the hell out of your meetings / correspondence with them - ecspecially if they don't follow your advice.

 
This is one issue with them that I've documented well.  The one I like the most is the note that says that I told him he should put a large chunk of his 401k $$ into a VA with an income rider - in 2007.  Today they tell me they don't trust that insurance companies will be able to back up their income riders.  However, SS, FDIC, their company pensions, and their current LI (Phoenix and Pru) are completely safe and worth banking their financial futures on. 
 
 
Nov 10, 2009 9:04 pm
Spaceman Spiff:
Wet_Blanket:

Document the hell out of your meetings / correspondence with them - ecspecially if they don't follow your advice.

 
This is one issue with them that I've documented well.  The one I like the most is the note that says that I told him he should put a large chunk of his 401k $$ into a VA with an income rider - in 2007.  Today they tell me they don't trust that insurance companies will be able to back up their income riders.  However, SS, FDIC, their company pensions, and their current LI (Phoenix and Pru) are completely safe and worth banking their financial futures on. 
 
 
 
Did they listen to your advice ? If not, send them packing. These people are driving off the cliff, they don't follow your advice, and you are concerned about "how to break it to them" ?
Nov 10, 2009 10:09 pm

Save More

Reduce Lifestyle Expectation
Work Longer
Get a better ROR
and last but not least, to make all of those projections work, all you need to do is.................
 
 
 
 
 
DIE!!!!!!!! Never said it was a popular option
 
Funny story about budgets. I don't do a lot of budget planning as most people don't have any money if they need cash flow planning, but get them to bring in bank statements and credit card statements and show them where the money is going. If the liquour store shows up too may times, that might be the problem.
Nov 11, 2009 7:50 am
Spaceman Spiff:

I've been working on a retirement projection for some clients and no matter how I try to look at it, it always ends up the same.  They run out of money.  Mostly because of some choices they're making right now.  They're spending almost $40K a year on mortgages (one primary residence, one HEL on the primary, and a rental house).  According to my calculations I'm going to have to pull about 9% off the portfolio for the next two years before I can back it off to a more reasonable percentage.  And that's hoping that they can sell their houses and consolidate into one in another state.  If they can't sell their homes I'll have to pull that high percentage off longer.  


Anyway, I'm just curious how you folks would handle telling them that they're screwed.  If they live just as long as the default expectancies say, they run out of money about 4 years before the wife passes away.  So, do you tell your clients that we can hope for the best, or do you tell them they have to cut out things like movies and dinner out or visiting their kids in different states and vacations ($8500 a year projection according to them)?  Anyone got a good way to share this news with a client?


 
Honesty with no B.S. works well.  It's rare that the client doesn't understand their predicament.  It's our job to help our clients reach their goals.  It's also our job to tell our clients when their goals are not attainable.
 
I'm curious.  How do you show your clients running out of money at a certain time?  I'm assuming that you are using calculations that assume a specific rate of return.  Is that correct?   I used to do that.  I no longer do.
 
I'm about to have to do this with a client who wants to retire, but her $2,000,000+ won't be enough.  Like everyone else, she'll have to choose between working longer or spending less or taking up heavy drinking and smoking.
Nov 11, 2009 12:07 pm

Our Jones tools don't have a Monte Carlo tool, so the only option I've got internally is the specific rate of return route.  I realize it's not even close to the best way to do it.  If you don't use that any longer, what do you show them? 

Nov 12, 2009 11:39 pm

I always think these posts are interesting. Don't we owe it to our clients to be brutally honest? Doctors don't have an option of telling a family that their 7 year old daughter has bone cancer. Lawyers don't have an option of telling their client that they are probably going to prison for 20 years. Our job is easy by comparison. "These figures show that you are behind for retirement. What do you think we should do, Mr Prospect?"

 
I guess I have never had a hard time telling clients/propects that they are behind. It is so matter-of-fact . Telling someone that they may have to work longer is simply a result of the decisions they have made up to this point in time. They should be thankful that they 1. Have an honest advisor who is shooting them straight, and 2. Are still employeed so that they can earn an income TO SAVE.
 
Does anybody feel this way?
Nov 13, 2009 7:32 am

WiAdvisor - that's why I love working with people with military pensions.  Their investments are supplemental.

I tell people that retirement has never been a right and that if they want a leisurely life, I can help with that, but we need to be realistic.  It won't be kicking up your feet and ALWAYS doing what you want.

Don't like what you do now?  What would you like to do?  Do you need to go back to school to do it?  Do you need to save money to open up a business?  Consulting firm? 

Do you want to work odd jobs doing different things around the world? 


Nov 13, 2009 8:56 am
Spaceman Spiff:

Our Jones tools don't have a Monte Carlo tool, so the only option I've got internally is the specific rate of return route.  I realize it's not even close to the best way to do it.  If you don't use that any longer, what do you show them? 



 
I'm a very low tech planner.  The problem with a specific rate of return in retirement is the obvious limitation of the fact that we can guarantee that it will be wrong.  "Mrs. Client, at 6% return and 3% inflation and taking $4000/month out of your portfolio, you will run out of money 12 years and 3 months."
 
It comes across as so exact which is why I think that this is an example of nothing being better than something.   We can be correct in every parameter, yet since the market will average 6% instead of getting 6% every year, the reality is that she may run out of money in 3 years or 50 years.
 
If I'm working with someone who is years away from retirement, this is how I do it.  "Mr. Client at what age would you like to retire?  How much money would you like to have on a monthly basis in today's dollars?"
Client: "I'd like to retire at 65 with $5000"
Me: "Mr. Client, at 3% inflation, you will need an income of $13,000"
 
(I don't need to pull out a calculator or do any calculations.  I have a one page excell spreadsheet that has 1,000-9,000 increasing at 3% for 1-50 years.)
 Me: Does that make sense to you?
Client: "Yes"
Me: "Let's figure out how much money you need to have that income.  You'll need $3,900,000." Let me explain how we came up with that number.  (I'll go very slightly into monte carlo simply to get the point across that even if the market averages 10%, we probably can't take out more than 4%.  I also use this information to get the client to understand the importance of having conservative money and ultimately, the advantage in many cases of WL insurance for those conservative dollars.)  4% of $3,900,000 = $156,000.  $156,00/ 12 months = $13,000, so our target is to help you get to $3,900,000.  However, there are things that we can do to make it so that you can succeed with less dollars, but we'll still shoot for that if it's reasonable."
 
However, I believe that you are talking about someone who is already in retirement.  T. Rowe Price has a couple of good pieces of sales literature with Monte Carlo.  They are basically one pagers in which you can show that using their assumptions if someone takes out a certain % every year their chances of having money left 25 or 30 years in the future.  It's easy to show somebody that if they take out 7% a year, regardless of how the money gets invested, the odds favor them going broke and the numbers are based upon equity returns of close to 9% after expenses. 
 
To answer your question, I just use very low key one page things to get across any points that need to be understood.  It should take less than 60 seconds to show a client that they are going to probably run out of money and no calculations should be necessary.
Nov 13, 2009 7:18 pm
Spaceman Spiff:

I've been working on a retirement projection for some clients and no matter how I try to look at it, it always ends up the same.  They run out of money.  Mostly because of some choices they're making right now.  They're spending almost $40K a year on mortgages (one primary residence, one HEL on the primary, and a rental house).  According to my calculations I'm going to have to pull about 9% off the portfolio for the next two years before I can back it off to a more reasonable percentage.  And that's hoping that they can sell their houses and consolidate into one in another state.  If they can't sell their homes I'll have to pull that high percentage off longer.  


Anyway, I'm just curious how you folks would handle telling them that they're screwed.  If they live just as long as the default expectancies say, they run out of money about 4 years before the wife passes away.  So, do you tell your clients that we can hope for the best, or do you tell them they have to cut out things like movies and dinner out or visiting their kids in different states and vacations ($8500 a year projection according to them)?  Anyone got a good way to share this news with a client?
 
 
YOU DON'T tell them they're screwed. You show them their deficits in the same manner a Dr. would present an adverse condition and then give them two or three possible ways of maximizing what they have.
Nov 14, 2009 1:09 pm

The doctor tells you that if you don't quit smoking you will be dead in five years. He might even send you to somebody who can help you quit. But he doesn't waste time worrying about it.
Spiff,  it sounds like you are worrying too much about your client.

Nov 14, 2009 3:07 pm

One of the most important lessons that we can learn is to not accept a client's problem as our problem.

Nov 15, 2009 8:49 pm

You can boost income with putting some $$ in a SPIA

Nov 16, 2009 10:13 am
buyandhold:

The doctor tells you that if you don't quit smoking you will be dead in five years. He might even send you to somebody who can help you quit. But he doesn't waste time worrying about it.
Spiff,  it sounds like you are worrying too much about your client.

 
I know it sounds like that, but I'm not.  I do like these folks and have been working with them for a few years, but I'm not going to lose any sleep over their financial situation.  I'm the messanger who gets to deliver the bad news.  That's it.  I was just simply interested in how other folks would handle this situation. 
 
I've tossed around the SPIA, but the clients have told me numerous times that they don't trust many insurance companies.  Of course that was last spring when we didn't know if the financial world was collapsing or not.  We'll see. 
Nov 16, 2009 2:10 pm

Emotions get in the way of making the right decision or taking the correct action.

 
Be direct and objective.  Your clients may not want to hear the news, but they will respect you for delivering the truth.