Executive Summary
Retirement signals complex spending, income, and identity shifts, often all at the same time, which is why many clients seek an advisor during this time. Often, as advisors are creating the projections of how a client's retirement may pan out, they have some combination of follow-up questions, good news, and notes of caution. However, sometimes, it becomes evident that a client's lifestyle cannot be maintained with their anticipated retirement timeline… which means it falls to advisors to have this tough conversation.
In this 203rd episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how to help a client who wants a retirement they can't afford – especially if their previous advisor has left them with the impression that they can afford that lifestyle.
First, advisors may want to minimize 'badmouthing' the previous advisor – even if they are internally exasperated or confounded by the prior analysis. Advisors may offer to walk the client through what they see instead, essentially "cocreating" or "co-realizing" the possible (negative) outcomes. (And if a client is really stuck on their previous advisor's advice, the current advisor may consider requesting previous meeting notes or other information – just to check what they may have missed!)
Second, by walking the client through the consequences of their action – and the probability that they'll need to adjust retirement spending – advisors can keep the focus on what, if anything, the client wants to do. Some clients may have enough cushion that they are comfortable with continuing with their current plan, then only adjusting if they need to. For other clients, they may need to consider a broader array of options, from working part-time for several more years to selling assets – and they may need to act with urgency. While these conversations aren't pleasant, it is nonetheless important to remain outcomes-focused and to be clear on how severe the shortfall may be. This helps to avoid both downplaying and catastrophizing the risks and outcomes.
Even if this conversation is unpleasant, once the potential retirement outcomes are explicit, then the client and advisor can collaboratively brainstorm potential adjustments. Sometimes, the advisor may be surprised by which options the client considers to be "on the table" once it is necessary to make some lifestyle changes. And it can be challenging to anticipate how everyone will genuinely respond in real time when those changes are necessary. A client may anticipate making certain changes, then may opt for different ones when the time comes – for example, they may be more amenable to downsizing their living space than everyone originally anticipated!
The key point is that adjustments to retirement planning may not be fun, but once the needed adjustments are understood by all parties, then the client and advisor have control again, as they are able to consider their options anew. Advisors will likely need to approach these conversations with a blend of hard analytics and empathy, but when they can "cocreate" a new plan with their client, they can ultimately build something sustainable that leaves everyone happier in the long-term!
Authors:
***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and YouTube Music.
Show Notes
- AdvisorEconomics
- Reframing Monte Carlo Results To Increase Trust In Dynamic Retirement Spending
- From Acknowledgment To Engagement: Key Questions To Reframe Issues And Get Action When Clients Are Off Track
- IncomeLab
Kitces & Carl Transcript
Michael: Well, good afternoon, Carl.
Carl: Michael Kitces, tell me one thing that's new. It's got to be quick. One thing.
Michael: One thing that's new. We're playing with a new software business called AdvisorEconomics, where we do benchmarking for advisory firms. And I have all new data to play with. And I'm so excited. We are now in the phase where firms are joining every day. And so every morning, I refresh the data dashboard so I can see all the new data on benchmarking of advisory firms.
Because this is literally my most exciting thing to do every morning, is to look at updated aggregate, anonymized data on advisory firms of how their financial performance is occurring. It's very cool. It's very cool. I've always had some gripes that I love industry benchmarking studies, but no one likes doing the spreadsheets that take hours to fill out. And so I had this passion thing for a while. It's the 21st century. We should just do this with software. And so we went and built it.
Carl: Very cool. So that's your most exciting thing right now in the morning?
Michael: Yes. Every morning. First thing I do is I refresh the data to look at all the new firms that have joined the past day.
Carl: Amazing. Well, what are we talking about today?
How Can Advisors Deliver Bad News To New Clients? [01:31]
Michael: Not benchmarking data, as much as I wish we could. Well, we're getting more data. Well, that'll be an episode in another couple months as we add to it. So what are we talking about today? I had a really interesting outreach from an advisor for a version of a problem that a lot of us face where clients get hooked on a path that they're taking that we can see is probably not going to go well, and it's hard to convince them otherwise. And this one has a particularly challenging hook to it. So I'll share with you what...we'll call them Sam. What Sam had shared in.
Carl: Sam the advisor.
Michael: Sam the advisor.
Carl: Okay.
Michael: So Sam had written in. I have a client, good amount of assets, but I don't think they can retire as quickly as they think, but I'm a newer advisor with them. They worked with another one for much of the past 10 years, and they are adamant that they are going to be okay because their previous advisor said so. And they think it works. They'll just spend less later if they have to.
And Sam basically says, "I am not convinced, based on the assets I see they have and their spending habits that I can see they engage in. They came out of the clear blue sky recently and built a pool just because they decided they wanted to have a pool now." So what do you say to this client that, as I think of it kind of as the double-edged sword challenge of they don't seem to understand or want to admit that their spending habits probably aren't going to work for their retirement, or it sounds like they're getting ready to retire and maybe should work more years than they want to.
And they're hooked to another advisor who said they were going to be okay. And now you're in the awful position of being the one who has to say, "You are not okay." So often, it's like... The great gift for us advisors, we do all this stuff, at the end of the day, what our clients really want to know, they just want to know, am I okay?
Carl: Am I okay? And the answer is no.
Michael: And the answer is... But someone else said the answer is yes. Truly, what a terrible position to be in when you're the one who has to explain to someone that you thought the answer was yes, but it might actually be no.
Carl: Yeah. Dude, first of all, big fan of a pool. How great is that?
Michael: You're on board with the pool. That's your...
Carl: On board with it. Spend the money on the pool. That's great.
Michael: That's great. Enjoy the pool.
Carl: Really funny story. My wife, I can't remember how old she was. She's always wanted a pool. And when she was little, and I think she was like 10 or 11 or 12 or something, my father-in-law, who's passed away, said, "If you dig the hole, I'll put a pool in." And she started digging. Never got a pool. Still talks about it to this day. Yeah. So anyway, big fan of pool, but that's not the point.
Michael: Fulfill her pool wishes. Okay.
Carl: Yeah. It's really interesting to... The first thought I had was sort of, okay, who's the hero of this story? Whose plan is this? So that was first. And I'm not sure it's exactly right, but I was thinking through, okay... Because, especially, the line that stuck out to me in your scenario was, or we'll just slow our spending down later. And I'm just making some assumptions. We always have to in these scenarios, because we don't have the complete information, and we know Sam's a rock star of a financial planner. So we're not worried about that part, but the... I'm just going to make the assumption that that's something the client said.
Michael: Yes. I think so. I was trying to lightly paraphrase and summarize his email, but yeah, he essentially frames it as, they think they have enough. And if they don't, they're saying they're going to spend...they'll just spend less. His concern is I've seen your spending for the past few years, and I don't believe you're going to spend less because I've seen how you spend, and you're not very 'less' inclined.
Carl: Not very less inclined. This must be a friend of mine. They must be related.
Michael: Reminding you of some people you know. Clients you work with over the years.
Carl: It might be me. I hope Sam doesn't work with me. Except we don't have a pool. So it couldn't be us. I think that... So, first of all, I would separate out, at least in my mind, it makes sense to start by separating out what past advisor has said, even though it's material to the client, but this feels like the approach you take doesn't necessarily need to be all about proving why that advisor was wrong. We can just start where we are.
And my favorite line for these conversations, and you just sort of have to decide... Yeah, we were just doing a workshop on this earlier today where you've just got to decide. So advice that feels like a punch in the nose and advice that feels like an empathetic hug, they should ultimately both be coming from the exact same source, which is love, right?
Sometimes really direct exposure of inauthentic behavior is the best form of love you can ever. Hopefully this sounds like parenting a little bit, sometimes we have to be really direct. And some of the best advice I've ever gotten has been the punch-in-the-nose advice.
So if we realize that's where we're coming from and then we also realize we don't know what the future will bring... It sounds like Sam's done his work. Something like an 8% withdrawal rate, a history of not being very less inclined. It seems like there needs to be some discussion around trade-offs or where we're headed.
My favorite way to start those discussions is... My favorite line, actually, is, "Could we have a conversation about this?" You're coming in for a planning meeting, whatever, they come in, and then, at some point, we just say, "Hey, this next discussion I want to just have with you, do I have permission to be candid?" Sometimes I would say Professionally candid. "Do I have permission to be professionally candid about this? Because there's something... I just want to walk you through it."
And then I always loved to say, "You may actually fire me for what I'm about to say, but you should definitely fire me if I don't." And then I would just walk them through the trade-offs. "Look, financial planning is all about...there's no right or wrong answer. It's just about trade-offs. And if there's any way to get this to this point where we're..." It feels so loaded because you're talking about money, living under a bridge, running out, being kicked out of your house, your kids having to sell the pool.
There's so much emotional baggage in these things that if there's any way to remove that and be more curious. "Let me just show you what I'm seeing. Just walk you through." And be really clear about the... Have some humility around the confidence variables. You know what I mean? Please don't say 92.77, just don't use a decimal place.
Michael: Ninety-three?
Carl: We could round to 90 or 95 even. That'd be fine. We're in the ballpark. We could use language like that, but, look, there's some fuzziness around this, but 8%, that's a pretty big concern. At this rate, if something doesn't change... We were just having this conversation with somebody really close to us. At the rate that somebody really close to us is spending, if something doesn't change, she'll run out of money in six years. And the question is...
Michael: Six years. That's even more extreme. I get the question. Sam's situation is more in the, I don't know, there's 60, and they're planning to retire at 62, and he's looking at the math and thinking this isn't going to go well for a 30-year retirement because they spend a lot. Six years feels like just even more acute right there.
Carl: Yeah. So, man, how great for Sam. There's interventions here. There's all sorts of options there. This could be fun, and playful, and rather... Six years when you're 75 is...there's not go-back-to-work options. Especially not in this scenario. So I love the idea of just being, "Let me just walk you through here. Here's what I see." And I'm imagining visually, this is really helpful, right? At the current rate, this is just not sustainable, and there's a bunch of...
So the question we want to do is, kicking it down the road is a total option. That's a tradeoff that if that's... That was back to my earlier statement about whose plan is it. If your plan is we're going to kick this down the road, I'm cool with that. I just want to make sure we had an articulated philosophy around this, but here's the other options, right? Work a little bit longer, you could find a job at the local... You can find a job you really like and work part time, so you don't have to tap in tothe money.
All those things we've talked about before, there's so many ways to be creative around this word 'retirement' now that, man, at this age with this much runway, what an awesome opportunity to have this discussion. And I don't think a word we just said has to say anything about some bad dude who didn't know what he was doing. Do you know what I mean? The client could bring it up, but John, and I'd just be like... "Maybe I'm wrong about this. I'm totally open to being wrong." But if somebody said, "But John promised me," I would just be like, "I'm not exactly sure... I'm hesitant to even comment. I don't know what John was looking at."
Michael: I was going to ask, what do you say? Because it sounds like part of Sam's scenario is the previous advisors said they're okay. And so, they're discounting Sam trying to say they're not because the previous advisor said they are. And we've got to a mom-versus-dad thing playing out here now.
Carl: Totally. I've always tried to handle these. I've never found it particularly helpful. And I just know when I'm in a situation where a prior person, whether that was an electrician, a landscaper, any prior, somebody who worked on my mountain bike, any prior person, if the person I was working with trashed the prior person, I just didn't enjoy it. It certainly didn't help the situation. It felt negative. And I don't think that's what Sam's asking at all. So I think I would...
Michael: I think it's, "But how do you handle when the client is basically saying, well, I know Sam, but Larry said we were okay?"
Carl: Yeah. So the way I would approach that is I would first keep that in mind, is, I can approach this without it requiring me negative-selling. And so the ways I could approach it would be either, A) say, I'm not sure what John the planner was thinking or doing. And without the benefit of all the notes and everything, I couldn't. But I am really sure about what we're doing, and let me walk you through why."
Or you could say, "Hey, if it would be helpful, we could do this, a little bit of an investigative journalism. Do you have notes from the prior meeting? Any of the agendas? And maybe I could walk you through. Maybe there's a fundamental assumption here that was missed." But neither one of those really require that person's dumb and selling stuff that I don't like, or whatever. You know what I mean?
Michael: Yeah. Yeah. Yeah. Yeah.
Carl: How would you handle it?
Putting Risk In Perspective With "Probability Of Adjustment" Scenarios [14:13]
Carl: With a giant spreadsheet.
Michael: No, probably just Monte Carlo, but... So this scenario reminds me of a similar client situation from years ago. It was one of my first moments that really changed my view around doing Monte Carlo projections for clients. I think I've mentioned this on some episode in the past. So was working with a couple, they had a fairly aggressive spending rate relative to their dollars. They had a lot more wealth. They were one of our larger clients, even back 20-plus years ago. Very healthy balance sheet, even more sizable spending pattern. Ran their Monte Carlo. It was a 60 or 70-something kind of thing.
And I remember how much trepidation I had going into the meeting and basically need to explain them, "Seventy percent Monte Carlo, this is really not good." And try to build up how we're going to break the news to them. And we get to the meeting, and we get a little ways in and kind of break the news, right? This is a 70%, 60-something probability of success. And he turns and says, "Oh, so we're odds-on bet that this is going to work?"
Carl: That's exactly what I was thinking. I was literally like, "Most of the things I do don't have a 70% chance of success."
Michael: And particularly striking for him...
Carl: Almost nothing.
Michael: Because his background was bond trading.
Carl: That's hilarious.
Michael: Bond trading. It's like 70% odds on a trade sounds amazing. Yeah, but...
Carl: You only have one life.
Michael: Yes. Yes. This feels kind of high stakes for, "Oh, it seems okay." And what they said, going down this path, they had a very sizable spending habit, but because he was a trader, he had lived a lot of ups and downs. This was in the 2000s. He had been trading all the way back to the '70s and '80s. And he was a bond trader for all the craziness of the '70s and the junk bond blow up and all the things. So he made the money and lost the money, made the money and lost the money, made the money kind of dude.
And so, what they basically came down to was 70% seems amazing. That's better odds than a lot of things that we already do in our lives. And look, you're our advisor and you watch this ongoing. So we're going to go take the trips. And if the other 30% is happening, call us, and we'll come home. But I'm not going to not live my life now because there's a 30% chance I can't. I'll just wait until we're at least close up to find out the 30% path is playing out. And then I'll make the modification. I don't need to give up the spending now in anticipation of. I'll give the spending up if it happens.
He's like, "Look, at the end of the day, I'm spending seven. You're saying I should spend four or five. It's a 2% Delta. It's not like this is going to go haywire in a year. This is going to go haywire in 10 years of my portfolio inching down by an extra 2% every year for 10 years, and 10 years from now..."
Carl: I love this guy.
Michael: ..."I would say it seems a little bit off." Because he's a protected capital guy. He's like, "This isn't going to blindside us. We're working with you ongoing." They basically worked with us because they didn't want to monitor it. They just wanted us to tell them. He's like, "I'm not going to adjust now. You call us if the bad things are happening and we'll make the adjustments then." And so, still, to this day, I stopped calling it probability of success and started calling it probability of adjustment.
Carl: Yeah. Love that.
Michael: That's what it was for him. There was a 70% chance that they were on track and a 30% chance that they were going to have to make adjustments, and they were fully prepared to make adjustments.
Carl: Love that. That's the kind of language we need more of. And by the way, how great is that idea of just being, "If we see this going the wrong way, we're going to have lots of visibility into it." And we've got levers to pull.
Michael: And so, in that vein, how my approach shifted in handling clients like this, I would then say, "Okay..." Sam didn't say what it is, but just, in general, you get clients like this. I'm going to assume he has some 6%, 7%, 8% withdrawal rate. So Sam's plugging into his planning software. It's not looking as good as what we usually like to see in recommend advisors. So I say, great. So I put that into my planning software, MoneyGuide at the time, RightCapital these days. I put that in my planning software. I pull it up with the client. So the number is whatever. It's 70% probability of success, 30% probability, we're going to have to make an adjustment.
So then I'll pull out some scenario modeling, right? What-ifs, decision center, or whatever it is, depending on your planning software of choice. Let's see what we would need to cut to get this on background track. How much of an adjustment would it take? I'll give a shout-out to IncomeLab, which has actually built some really cool tools to model adjustments more dynamically, to model guardrails. So you can see where clients are drifting too far out of whack.
But to me, the powerful conversation I found was, say, let's put up on the screen, just if the bad stuff's happening, we have to make the adjustments five to 10 years from now. What would it actually take? And sometimes I find it's even surprising from the advisor's end. That's not as bad as I actually thought it was going to be. I remember one of these for a client that at the end of the day, they had a very sizable pension, Social Security, and not a huge portfolio.
And so what that meant was the incremental spending above their Social Security and pension was pushing their portfolio really hard, but it wasn't a big percentage of their total spending. So they actually didn't need to change their total spending very much to massively change the withdrawals on their portfolio. And we had this scenario where their probability of success was another 75% or 80%. And what it basically came down to is if the bad things are happening, you'll have to sell the lake house.
And that was enough to completely shore up. And it was not a super big, huge, very expensive lake house, but it was more than enough to sell the whole thing. They're like, "Wait, if the worst-case scenario is when we're 80, we might have to sell the lake house. We're not even sure we're going to be going to the lake house when we're 80. So that's not a concern. We're fine."
Sometimes it's a modest adjustment. Sometimes it's larger. But I found, A, let's just do some scenario modeling, would do it on the screen with the client in the conference room or screen share, or whatever it is. Let's just see, can you use the what-if scenario tools? How much of an adjustment would it take? Is it 10 grand of spending? Is it 20 grand? Is it 50 grand? Is it sell the vacation home? Is it just a massive change of lifestyle? Is it, we'll have to get a reverse mortgage. But as long as we top the equity in the home, we'll be okay.
Find out what it is and get to a number. Sometimes that's illuminating unto itself because even from our advisors, I find sometimes the change is not as dramatic as we expected. And then to the extent it is, what I got to that, at least for me, I found was pretty effective with most of the clients in this situation. Once we got some number, all right, the bad things are happening. Looks like we'll have to cut about $32,000 a year spending a decade from now. Just scenario, plan this with me for a moment. If it happens, if we get there, what would you actually cut from your budget?
What would you do? Hopefully, it'll never come, but you hired me to help you plan. We're planner types. We like to plan. So I just want to have some idea of a plan in place. What would you cut? And what I found through those conversations is some people could answer that with remarkable ease. Oh, that's basically just our fairly vacation budget. We'll just not take as fancy vacations.
Sometimes they started tapping assets. They didn't say they were going to want to tap, but all of a sudden, if bad things are on the table, they're willing to. It's like, great. Then I know we're going, "We'll sell the lake house. We'll downsize the house. We'll do a reverse mortgage." Suddenly, other things come on the table as possible. It's like, great. If you know what you're going to do, if you know what lever you're going to pull, then I'll find us the planner.
And then every now and then, we would get someone where they would go through, oh, there's plenty of things you can cut. Cool. Just scenario through this with me for a moment. Let's say some stuff. And they'd say a few things, and we're like, "So that added up to seven. You need to get to 32. What else?" Okay. Now we're at nine. You still need to get to 32. What else?
And they really couldn't come up with it. And at the point that they said, "We'll just cut our spending later", and then they really could not come up with what they would cut, started change behavior for a bunch of them to say, "I guess maybe we do need to do this later. Now that we're going through the exercise, I'm realizing maybe there's not as much to tap as we thought." But I will say, I guess, owning it from the advisor end, the changes were less severe than I expected, or the client accommodations were actually more manageable than I expected in the overwhelming majority of cases.
I really adjusted over the years how high of a Monte Carlo projection I anchored to. I liked to see 90% to 95% kinds of things for a long time and came way, way down from that because in going through these exercises, I found the sensitivity to adjustments and the ways that clients can just, if they have to... We're all hoping you won't have to, but if they do have to, are actually more flexible, I think, that we often give them credit for.
And ironically, although certainly not universally true, many of my bigger-spending clients were also the ones that had the most flexibility to make changes. They didn't want to, but the irony is the high volume of discretionary spending, it's discretionary. They like the lifestyle, but they do have ability to make change in difficult times to tighten their belt if they have to. They're just really hoping they don't have to. And they certainly don't want to give it up out of, "I'm going to give up the things I want to do now because there's a chance I can't afford them later. Why don't I just change them when I can't afford them?"
Setting An (Articulated) Plan On How To Adjust Retirement Spending If Needed [26:30]
Carl: Yeah. Look, to kind of put a bow, wrap this up, that's really good. And I think there's two things that are important to me to remember. One is an articulated plan. And I like this in advance. I used to always ask clients, "Hey, if we ever were there, which lever would you want to pull first?" "And remember, you were only talking about spending levers. There's plenty." "Oh, well, the Lake house was not a spending lever. It was an income lever." So...
Michael: I would start with spending levers. I always started with spending levers. And when they look at what they have to cut, suddenly, sometimes assets come back into play...
Carl: I remember this crazy cut.
Michael: ...That weren't in play before. Because, at the end of the day, they really don't want to cut their spending. So, suddenly, they're willing to put certain assets on the table. Great, that worked. You can get the math lots of ways. Just you told me that wasn't on the table, and now it is.
Carl: Yeah. You could die earlier. There's all sorts of levers that we could... That was a joke.
Michael: That's a more challenging lever to pull. But, yes.
Carl: I'm just simply saying an... And the articulated philosophy could be, "I don't want to worry about this right now. Let's talk about this in a couple of years." As long as it's articulated, remember, it's the client's plan.
Michael: Now you're making it uncomfortable, Carl.
Carl: I know. You can decide whether you want to be involved in that, but it's the client's plan. The second thing that I think is really important here is that we are notoriously bad as humans at projecting how we're going to handle a scenario. You're terrible at saying, "There's no way I could ever handle a kid." And when you have one, you look at people with two and you're like, "There's no way." And when you get there, you MacGyver-style this stuff together, some bubble gum and duct tape and a paper clip.
We're actually pretty good at dealing with risky situations when we're in them. We're really, really bad at projecting how we're going to handle them. And I think remembering that, which is what the bond trader guy was essentially saying, "Hey, let's just keep an eye on this." And then one quick last story, because we got to wrap up. I remember having this exact conversation with... This was somebody who made... Their budget was.... I'm embarrassed to even talk about this, but it obviously was not me.
This is somebody in the movie business, and his budget was seven million dollars a year. That's how much he spent, and he was spending eight. And his team was super nervous about how to break this news to him. And they prepared all these... This is where I heard about it, right? They prepared all these spreads and were asking questions like, how do we break this news? And they went into print, and he's like, "Wait, wait, wait, wait, wait, wait. What did you guys, what? Just get me another movie."
Michael: You don't cut your spending. You make the income go up.
Carl: Yeah. "Just give me another movie, and we're set. It's fine." So I think sometimes we got to remember the client might have ideas in their head too. "Sell the lake house, get me another movie, die a little earlier." Who knows what the scenario is, but the client has ideas too.
Michael: I love it. I love it. Thank you, Carl.
Carl: Cheers, Michael.
