By: Kali Hawlk
Many fee-only financial planners focus on creating comprehensive financial plans for their clients. They focus on developing savings and investment goals, and help people figure out when they can retire if they meet certain milestones along the way. But what happens when clients fall short and don't save enough? What happens when, against the best advice of the planner, people make bad decisions with their investments and end up with a smaller nest egg than expected? For many, the only option is to keep working and continue earning – and saving – income. This decision can present challenges for both the clients and their advisors, and it's important to understand how to update financial plans when clients keep working.
How to Change a Financial Plan
When you need to change a financial plan for a client who continues to work instead of retire, you need to take certain factors into account. Social Security benefits could be one of the biggest areas of change to the plan. "You have to make sure they are aware of the impact of working on Social Security," says Jamie Block, a certified financial planner (CFP) and advisor at Wealth Design Retirement Services. "There will be an increase in wages contributing to their work record which may increase their eventual Social security benefit. The client [also] needs to be aware of the wage limitations when collecting Social Security before full-retirement age."
Alex Yeager, CFP and founder of Everlong Financial, says financial planners can suggest flexibility in the new plan. "A client who is flexible with their goals and willing to give up some goals to satisfy required needs can have a successful retirement," he explains. "They must remember what items they can control – timing of retirement, discretionary spending in retirement, working a part-time job in retirement, downsizing their home – and what they cannot control with much certainty, like market returns, life expectancy."
Alternatives to Full-Time Work
Some clients may not be able to continue working full-time for their employer, whether they want to or not. If this is the case, but they still have a need for income to supplement what they've saved and invested, advisors can help them find alternatives. "In this case, the discussion centers around part-time job possibilities, or hobbies they enjoy that could potentially earn them some income on the side," explains Erik O. Klumpp, founder and president of Chessie Advisors. "It may make sense to retire to a part-time job to stretch their savings out a bit further, while also being able to enjoy a semi-retirement while they're still able."
Block says that advisors can help clients in this situation by being proactive. "Meet with clients at least twice per year. Talk about retirement plans and how they are liking their job to get a measure on happiness," she says. "If the client isn’t happy in their job, they will most likely want to retire sooner than clients that enjoy their job."
Choosing some form of work will help keep clients out of their current savings and investments, and even Social Security benefits. The longer they can delay taking benefits, the more they'll receive. A similar thing can happen with investments: the longer a client holds off withdrawing from their earnings, the more time their assets can continue to compound and grow. If a client can continue working and living off income they earn, just a few years can make a big difference to their overall retirement plan.
Making Retirement Work with Less
Continuing to work may not be necessary, depending on how flexible the client is willing to be. "If a client retires and falls short of his savings goal or cash flow desires there are a few options," says Drew Weckbach, a financial planner and member of XY Planning Network. "The simplest one is to spend less." Weckbach also says advisors can help their clients with a strategy known as dynamic withdrawals. "The premise is based around a client's spending flexibility," he explains. "When the market is up you can spend a little more. When the market falls you have to be able to tighten the belt. Since the market performs well more times than not this creates a larger inflow for retirees."
Yeager says that advisors should be prepared to have some difficult conversations with clients when they're in this situation. "They may have to recalibrate living expenses and eliminate that annual vacation or reducing the number of nights out for meals," he explains. "It may mean downsizing and pulling equity out of their home."
The Bottom Line
Adjusting a plan for a client who keeps working instead of retiring can be tough. Oftentimes, it means looking at ways to cut back on spending or how to best maximize the continuing income. Clients need to adjust expectations and goals, and it's the financial planner's responsibility to guide them to smart decisions so they can get back on track with the retirement they really want.
"You are not being paid to just be a client’s friend," Yeager advises. "You are being paid to provide advice and guidance. Sometimes that advice is tough to deliver. However, you have a responsibility to your clients to have these conversations so that they have the best opportunity to either improve their situation or adjust their expectations."