Clients Often In Left Field With Retirement Expectations: Survey

The expectations of pre-retirees aren't all that realistic, concluded a new Nationwide survey of U.S. adults age 50 and older.

In fact, survey respondents believe they'll get more from their retirement savings and from Social Security than is actually possible.

That’s a problem for investment advisors, who have enough challenges tamping down the unrealistic expectations of clients heading into retirement. Those advisors face an uphill climb in snapping retirement clients back to reality.

According to the Nationwide report, pre-retirees expect they’ll receive $1,578 or more in Social Security payments every month. Americans in retirement right now receive less - $1,487 per month.

Additionally, pre-retirees believe they’ll spend the bulk of their post-career income on housing and food. But the reality is that current retirees spend most of their money on health care needs.

“The sad fact is that most people don't want to deal with reality,” said Ilene Davis, an investment advisor with Financial Independence Services in Cocoa, Fla. “If they talk to a financial advisor that tries to force it, many will go where they are told what they want to hear.”

Consequently, the big question for advisors is how can they curb unrealistic expectations on their retirement savings, and when should they act when clients refuse to remove their rose-colored glasses?

“I’d start with a comprehensive financial plan – it’s an excellent starting point for defining goals and determining needs in retirement,” said Aaron Milledge, co-founder of Targeted Wealth Solutions in Erie, Colo.

The collaboration between an advisor and client is “important to generate realistic assumptions at the very outset of retirement planning,” he explained.

This initial process of defining goals and outlining a desired lifestyle in retirement may be the first opportunity for an advisor to steer a client back to a more realistic outcome.

Another good idea – use images to introduce “realism” to planning efforts.

“Illustrations are powerful tools to show clients an expected terminal value of their portfolio or a level of spending they'll be able to achieve in retirement,” Milledge said.

Additionally, advisors must be careful to use appropriate assumptions as far as capital markets and expected returns are concerned, Milledge advised.

“This creates a need for dialogue between the advisor and client to discuss the pain points of modeling future asset returns,” he said. “The client needs to understand that the reality of the market is often far removed from the well-behaved nature of academia.”

Money managers can also have their clients “test” themselves for retirement income needs, using Social Security as a benchmark.

“One of the keys to retirement income planning is to determine your retirement income gap,” said Colin B. Exelby, founder of Celestial Wealth Management in Towson, Md.

The difference between your income from Social Security and pensions and your living expenses is the number to focus on, Exelby explained.

To create a realistic retirement plan, advisors first need to perform a Social Security maximization test.

“If you’re client is single, it’s easy,” Exelby said. “Go to SSA.org, log in and find out what your benefits will be. Based on current laws, every year you delay taking Social Security payments, your client’s income increases by roughly 8 percent, and clients should know that.”

If you’re client is married, there are potential maximization options to strategically file and claim your benefits at different ages.

“Don’t forget to perform a similar analysis on pension benefits if your client has them,” Exelby said.

Once you determine what your client’s guaranteed income would be in retirement, then project your client’s annual expenditures.

“Old rules of thumb are to take 80 percent of your last five years average working salary,” Exelby said. “But rather than using a rule of thumb, track your client’s actual expenses for an extended period of time, and then make assumptions about which ones will increase (like health care costs) and which will decrease.”

Your client’s accumulated savings will have to fund the income gap.

“It’s generally accepted that spending 4-to-5 percent of your accumulated savings annually is a reasonable expectation if invested in a balanced portfolio,” Exelby said. “The more of that gap you can cover with low-risk investments, the better you – and your client - should be able to sleep at night.”

By and large, an advisor shouldn't just tell a client that their retirement dreams are impossible to reach.

“Instead, advisors should work with clients to develop solutions, contingency plans, and adjust spending and lifestyle expectations so that a client approaches retirement well-informed and with the highest probability for success,” Milledge said.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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