How much do I need for retirement? This is one of the questions clients constantly ask, in conjunction with am I on track and how long will my money last? All of which revolve around the same theme: financial certainty.
To provide sound advice, you need to have a good understanding of your client’s current financial picture. A Financial Needs Analysis (FNA) takes into consideration assets, liabilities, incomes and expenditures and describes the starting point fairly well. On-going engagement is also an important component of this as your client’s needs will change as their risk profile changes; the days of advisers only engaging with their clients once a year needs to be relooked at.
A winning gameplan
If we consider coaching principles, a coach will assist a client with getting from where they are now to where they want to be in the future by setting goals, strategies and actions. This is not dissimilar to financial planning, where the planner endeavours to understand the goals of a client and proposes a road map to achieving these goals.
There is a particular skill in having a successful goal discussion, because the goals themselves are often stated in words rather than numbers. A skilled planner will have the ability to monetise the goals and inject the numbers into the FNA, possibly changing the current picture. The result is often that the money will run out earlier than previously considered.
The planner should then model different scenarios that would assist the client to achieve the stated goals. A number of strategies will then be considered and the planner will ultimately provide the client with the best advice.
Longevity is a concern
People are living longer than they used to, and many individuals have to live off their savings for a longer period of time. This puts significant pressure on their financial plans, and their money management.
When planning for this phase of their lives, the planner needs to consider how much their clients have, how much they need, what the gap is and how they are going to help them bridge that gap.
In a high inflationary environment with economic and political uncertainty, planning for one’s future is challenging. Although the JSE all share index is at an all-time high, nothing is guaranteed; the rand is volatile and interest rates have already begun their upward climb It is vitally important that the planner has an honest risk conversation with clients so that realistic expectations are set.
When projecting the capital amount required for one’s retirement phase, the answer is often alarming because of the length of the period, as well as the inflation. The capital needs to grow with inflation, plus one should take into consideration the amount needed for a clients’ draw downs, because you will also need to strike the fine risk-return balance, especially in clients’ later years.
Risk assessment is vital
Planners need to advise their clients to take risks in order to achieve their goals. This includes a draw down rate that will allow clients to live the lifestyle that they want.
The reality is that not all clients are in a position or on track to retire successfully, and therefore they will need an adjustment to their plan. This is in most cases a conversation around budget and commitment, underpinned once again by risk.
Upfront positioning is the key to preparing clients for their future. In your first conversation, you need to understand their retirement needs and wants and clarify their expectations. If you can introduce them to risk and investment concepts and basic theory during the advice process, it would help to ease tough conversations down the line. Clients also appreciate the time planners take to explain complicated things in a simple way, entrenching the relationship and securing it over time.