Getting Clients to Follow Your Advice: The Overspending Retiree

I would highly recommend my friend Dorian Mintzer and Roberta Taylor's book, "The Couple's Retirement Puzzle: 10 Must-Have Conversations for Transitioning to the Second Half of Life." I think this resource can help couples flesh out their vision in a way that is more realistic and has better will behind it. 

Kol Birke: I love what Olivia said, especially in terms of digging into what clients care about.

In a negotiation class I took years ago, the biggest thing that stuck with me is the difference between "interests" and "positions." For example, a position might be "I want to pay for my kids' college." But there are interests driving this position, such as wanting to support the children's future. Once you figure out what the client's interests are, you can potentially find a new position that might work almost just as well or maybe even better without putting them in financial peril.

That said, in many of these situations you can get away without as much conversation by simply reframing. Let's say these clients have $1 million in their portfolio and they need to be drawing income from it for the rest of their lives. Whether you use a bucket approach or a simple 4%  withdrawal rate from that portfolio, let's say they'll need $800,000 to support their lifetime income needs. The remaining $200,000 becomes their discretionary fund.

So if the wedding for their kids goes from $10,000 to $20,000, instead of them thinking, "Oh, what's another $10,000 against a million dollars?", they're now comparing that extra $10,000 against $200,000, which is the only discretionary money they'll have for the rest of their lives. So now they'll tend to be more careful.

Whether you actually create a separate account, which is what Minnesota-based financial advisor Jonathan Guyton does, or you just describe it to them as a separate pool of money, this approach tends to have a really nice impact. And it gives them choices. If they start to run down that $200,000 too quickly, you can say, "No problem. As we've discussed, $800,000 should be able to provide you about $2,500 a month to cover your expenses. If you'd like to move some of that $800,000 to your discretionary fund, we can adjust the $2,500 a month down. It's your choice."

By framing it nicely with this separate $200,000, as Jonathan Guyton suggests, it puts the decision in the clients' hands. "Over the course of your life you can make whatever decisions you want, whether it's a vacation, a new car that you hadn't planned for or whatever else. You can use your money for anything." This tends to be a nice, practical approach to curb clients' overspending in retirement.

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Read the original Investment Advisor column and the entire series of scenarios.