It’s a dirty little secret that a lot of financial advisors would prefer to avoid discussing. In recent years, the Great Recession, near-zero-interest rates, the so-called lost decade and an anemic labor market for a broad cross-section of the U.S. population have all conspired to cause many retired clients to deviate from their withdrawal plans.

Probably the biggest single factor prompting clients to stray from the goals in their retirement plans is the financial woes of children and other relatives who require unexpected support. Whether it involves paying a son’s mortgage or a granddaughter’s college tuition, few financial plans developed decades ago anticipated retired clients undertaking these sorts of major expenses for a sustained period.

Moreover, the degree of long-term unemployment that the U.S. has experienced since 2008, unseen since the 1930s, was never on many advisors’ radar screens when retirees were working. Studies show that pre-retirees who lose or leave a job for six or nine months during their working years can see their retirement plans altered far more deeply than one might imagine after a temporary departure. So an even lengthier leave or a permanent exit from the labor force can sink the ship.

Linear approaches to retirement planning died in the 1980s. For the last two decades, advisors have attempted to develop plans that are constructed to ride out extended bear markets and address unforeseen health issues and the like.

Monte Carlo simulations were designed in large part to orient clients toward the wide range of potential outcomes for their portfolios. But as fashionable as Monte Carlo became in the late 1990s, it was highly unlikely that it could prepare clients for two of the nastiest bear markets in the last 100 years. On top of that, advisors never really know how clients will address a variety of misfortunes, let alone simultaneous ones, until they are forced individually to confront them.

It wasn’t supposed to work out this way. After all, financial advisors and their clients are a self-selecting group. The majority of clients earned their money the old-fashioned way, through hard work and savings. With the exception of those who came into their money through an inheritance and brought another set of attendant problems with them, most clients embody the virtues that made upper-middle-class America strong.

Last May at Financial Advisor’s annual Retirement Symposium, Ross Levin of Accredited Investors in Edina, Minn., asked an audience of more than 150 advisors how many of them ever had clients who ran out of money. Fewer than five raised their hands, though it was hardly the sort of achievement advisors would seek to take credit for among their peers.

Levin’s point was that for many clients, especially among the thrifty members of the Silent Generation, the bigger retirement problem was spending too little and failing to enjoy the fruits of decades of hard-earned labor. His point was well taken and certainly applies to a large subset of clients, particularly pre-baby boomers.

However, running out of money and running low on money are two distinctly different issues. One of Levin’s points was that many of his clients dramatically changed their consumption patterns in early 2009, dialing down purchases of discretionary items such as vacations, while postponing purchases of big-ticket items like new cars. Most Americans undoubtedly did the same. At a time when many were wondering if we were returning to a hunter-gatherer, agrarian society, conspicuous consumption was not only in poor taste; spending simply felt lousy for a while.

Levin is “shocked” by the idea that clients, in many cases 5% or 10% of advisors’ total retirees, are in danger of running out of money. If this is a problem, it must be for one of four reasons: 1) the portfolios are invested incorrectly, 2) a client’s established withdrawal rates were inconsistent with actual portfolio withdrawals, 3) cash-flow projections were too aggressive or 4) the client disregarded the advice. Most advisors faced with clients confronting these predicaments cite problems Nos. 2 and 4 as the culprits.

Other advisors say it would appear that Levin and his clients may be lucky enough to live in their own rarefied Lake Wobegon universe, where everyone is above average. In an advisory world with thousands of RIAs and hundreds of thousands of clients, the odds are that there always will be a few firms like Accredited Investors that, together with their clients, have a self-selection process that works out well for both parties.

However, that’s not likely to be the norm. “My guess is that 100% of clients occasionally fall off the wagon, as it were, in terms of their retirement spending strategy, but almost all of them get through as long as they have a longer-term plan,” says Norm Boone, president of Mosaic Financial Partners in San Francisco. That assumes, he adds, they are working with a firm to help them make adjustments along the way.

Not all clients follow the advice they are given. The magnitude of the 2008 financial crisis paralyzed more clients and advisors than might admit it. Simply put, a client with a classic 60/40 portfolio easily could have suffered a 30% loss of capital, assuming he or she didn’t panic or rebalance.

More than a few did panic and some refused to re-enter the equity market, consigning their portfolios to a permanent impairment of capital. Anecdotal evidence indicates that a larger subset of clients kept their toes in the equity markets, but reduced their exposure significantly at precisely the wrong time, limiting their upside in the 120% rebound since March 2009.

Ironically, Stark & Stark attorney Tom Giachetti told RIAs at the TD Ameritrade Institutional conference in early February that some clients who bailed out of stocks when the Dow was at 7,000 and failed to re-enter the market are now suing their advisors in an effort to recoup their losses. Brian Hamburger, managing director of MarketCounsel, says he has heard of such cases, but doubts they are widespread.

Compliance experts agree that if a client strays too far off course, advisors should consider terminating the relationship. At the very least, the terms of the engagement should be rewritten to take account of changing circumstances to minimize future liabilities.

It doesn’t take a CFP license or a degree in mathematics to realize that a $1.4 million portfolio can’t support the same living standards as a $2 million one. But financial advisors try to construct retirement plans with a built-in margin of safety. So if a client has to deviate from a financial plan for a year or two, it shouldn’t have an irreparable effect on a 25- or 30-year retirement.

Still, there are millions of Americans who never got the luxury of working into their 60s. Instead, they were forced by some external event, like a corporate downsizing or the sale of a business, to retire much earlier.

Among clients who retired in their 50s staring at a potential 40-year retirement, the problem can be more acute. “The problem isn’t with older clients in their 60s and 70s who worked for years at one or two companies, got their gold watches and pensions and sent their kids to Ohio State,” says Judy Shine, CEO of Shine Investments in Englewood, Colo. “It’s with younger clients who took early retirement before the Great Recession and are still spending at rates that aren’t sustainable.”

Assets also make a major difference, Shine says. A client with a $4 million portfolio typically confronts easier choices when deciding to downsize his or her lifestyle than one with $2 million.

Younger retirees often are the crux of the problem. “So many of these people want to retire so badly they jump at the first buyout offer even if it isn’t best for them,” says Lou Stanasolovich, CEO of Legend Financial Advisors in Pittsburgh. The longer they stay out of the labor market, the less likely they are to find another job with similar compensation.

Contrary to conventional wisdom, Stanasolovich finds many retirees, particularly younger ones, often spend 125% to 135% of their pre-retirement income. “They have more time on their hands, they travel more and spend more,” he says, adding this can continue until the client reaches the mid-70s. “I spend more on Saturdays and Sundays than on Monday through Friday.”

Financial advisors can find themselves in an awkward position if they try to come between clients and their children in need. After all, it’s the clients’ money to spend or give away as they see fit. “Often it’s the parents’ problem because they allow this to happen,” Stanasolovich says. Several of his clients finally wised up and told their children to talk to their advisor at Legend, and they “let us be the bad guy.”

But a mere discussion of the problem with clients may not translate into action. “It’s difficult to ask clients to reduce their spending cold turkey, so you have to broker or bargain the future,” Shine says. “The consequences of spending more today is spending less tomorrow. This is the hardest part of the job.”

She or her staff will sit down with clients and do a spreadsheet. “It will say you can spend $75,000 a year for the next 10 years and then we are going to have to go down to $60,000,” she explains.

A final option available is a reverse mortgage, but it is a very sensitive subject. Not surprisingly, big-spending clients tend to have big pricey houses worth close to seven figures. Simply raising the prospect of clients having to hock their houses in their 80s gives them a cold dose of reality. Nonetheless, it is an insurance policy of sorts. “They really don’t like the idea [of reverse mortgages], but when you bring this up, they really start to get it,” Shine says.

Shine and Stanasolovich have more than their share of tales of clients spending extravagantly on adult children, providing them with a lifestyle they won’t be able to sustain. “I ask them how they will feel as time goes on and they are not able to help their family in the ways they are currently helping,” Shine says. “I also mention that they are spending their children’s inheritance—they hate that.”

Generosity is a virtue and most of these clients are highly intelligent, kind people. But the impact of them running low on funds affects their children and grandchildren as well. MarketCounsel’s Hamburger sees advisors encountering intergenerational issues when a retired client dies and their children are disappointed to learn their inheritance is a pittance. From a liability standpoint, the inheritors don’t have legal claims with any merit, but their shattered expectations probably will send them searching for another advisor.  Then again, would you want them?


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