By APELLES POH HONG PANG
We’ve all had a client walk in the door after falling into one of the many financial traps that threaten the retirement prospects of a concerning amount of people. In my home country of Singapore, for example, only 30 percent of people are on track to retire with enough money. The problem is compounded by the fact that overcoming one of these obstacles does not necessarily prepare someone for the next. By leading clients away from common pitfalls, we can ensure their retirement savings have a solid foundation.
It’s all too easy for clients to procrastinate on retirement preparations when life is full of significant financial needs. Clients have many reasons for thinking they should wait to save, and we must equip them to counter those impulses. Retirement planning must start now instead of waiting for the next raise or bonus. While we can sympathize with – and help plan for – financial obligations like student loans and mortgages, we can’t let saving fall by the wayside. After all, our clients will have to support themselves far down the line, when their grandchildren and great-grandchildren are in college.
Just as bills are not a reason to avoid saving, voluntary purchases should not distract clients either. There’s no harm in working toward a new phone or TV – if it doesn’t precede retirement planning. Reinforce that saving for retirement determines if clients are able to eat and have a place to live when they’re older, and that’s more important than whatever new gadget becomes available.
When facing apprehension about starting to save immediately, break out the numbers to demonstrate how much clients lose by putting it off. The earlier preparations start, the more help clients receive from the power of compound interest and the more funds they have when they retire. Show how waiting 10 years can mean losing out on hundreds of thousands of dollars (due to the effect of compounding interest).
Some clients easily establish and stick with a regular savings schedule, only to contribute less than they should. Retirement shouldn’t be a “set it and forget it” task that doesn’t change – to save adequately, contributions need to increase over time. This applies to clients who saved less at the start of their careers when they had lower incomes, and ones who put off contributing altogether. Retirement savings may need to last 30 years, so the goalposts for savings must be regularly moved.
Explain how to account for future inflation when setting aside retirement funds. Your clients may recall the lower costs of living that existed in their youth – make sure they’re aware that this trend will continue into the future. Medical costs also often rise as people age, and should be accounted for as early as possible.
Relying on unsecured sources of income, such as support from their children or religious communities, may lead some to reduce their individual contributions. While these kinds of safety nets play important roles in our society, clients should never be without their own resources.
Clients who save the right amounts at the right times can still put their money in the wrong places, and investing too conservatively can result in a rate of return that falls behind inflation. Educate clients about how this effectively means they’re losing money over time, leaving them to play catch-up later.
One way that clients create portfolios that are too conservative is avoiding the markets altogether. They pour funds into bank accounts, CDs and insurance policies. These options can be part of a financial plan, but clients who rely on them exclusively likely won’t see enough interest generated to cover their financial needs. Be clear that excessive conservatism in investing causes greater risk of running out of money in retirement than market fluctuations do. Once emergency funds, medium-term needs and necessary insurance are covered, investment funds should go to assets with higher returns.
Even with that knowledge, there may still be concern about market risks, so be transparent in explaining how you plan to mitigate it through diversification across stocks, bonds, cash and other products. Dollar-cost averaging is another strategy we can explain, focusing on how buying at regular intervals no matter the market shifts will help smooth out the impact of those shifts over time.
Our clients worked hard for their money; and it’s on us to help ensure it is working hard for them. By equipping your clients with the knowledge to understand how to best use the financial assets they have, you ensure they truly get to experience their golden years.
Apelles Poh Hong Pang, MFP, CFP, is the principal trainer of Eagle’s Wings Training and Consultancy. He has been a member of MDRT for 25 years, with 10 years of Top of the Table membership. He has written two books and was awarded the inaugural Singapore Financial Adviser Representative of the Year in 2004 in recognition for his excellence and contribution in the field of financial planning practice. Apelles is also a motivational speaker, and has spoken throughout the Asia-Pacific region. In 2016, he was a platform speaker in the MDRT Annual Meeting in Vancouver, Canada. He lives in Singapore.