Helping affluent clients who overspend and possibly risk their retirement is an opportunity to strengthen your relationships and even grow your business, according to Serena Cheng, a financial advisor with Richardson GMP Ltd. in Toronto.
Cheng sees this situation often and works with her clients to understand the needs that drive their spending so they can get back on track with retirement planning. This strategy benefits Cheng’s clients and her business.
“We get a lot of referrals [from clients who] can’t believe how deep we delve into understanding their spending patterns,” Cheng says.
Cheng offers four steps to helping clients who overspend:
1. Perform a cash-flow analysis
Conduct a detailed examination of your client’s expenses. Start with mandatory spending, the client’s residential and transportation needs.
If your clients have children, ask about costs related to babysitting, nannies, medical expenses, sports, camps and tuition.
You also should discuss their investment and savings habits as well as their recreational spending, personal care (spas and hairstyling) and entertainment.
Remember, you’re not judging the client’s spending patterns but are looking to understand them, says Cheng.
2. Provide two projections
Using your knowledge of your client’s spending pattern and income, come up with two projections that cover a “best case” scenario and a “worst case” scenario regarding the date on which your client can retire.
These projections will also indicate how much income your client can expect in the post-retirement period. You want to see whether clients will have 80% to 100% of what they currently spend available to them once they stop working.
3. Discuss choices
The projections will allow clients to understand their options regarding retiring at a specific age and what income they will have available at that point.
If their spending patterns have put their original retirement projections at risk, clients have some basic options: spend less, retire later, work part-time or try to increase their income through a new job.
It is not the advisor’s job to tell clients how they should increase their retirement income.
“What we do is look at the big chunks of expenses,” Cheng says, “and understand if they are vital to their happiness and wellness or if they are not as important.”
So, after talking through what makes your client happy, the answer might not necessarily be to spend less. You may have a client who refuses to give up her annual vacations but enjoys her job and is content with working until she is 70 as opposed to 65.
4. Review your client’s investment contributions
Your job is not to babysit clients while they make those changes to their lifestyle, according to Cheng.
However, you can check in if clients are not following through with additional funds to their retirement-savings portfolio.
For example, if a client agrees to invest an extra $50,000 a year but does not deposit that money, explain that you must revisit your last projection because your current numbers depend on that additional contribution.
Update that projection in front of your client and show him or her the difference sooner rather than later, Cheng says. Remind your client that the older they are, the less time they will have to save.