Right now many advisors are having a tough time helping clients plan for retirement income. Even with an economic recovery in the works, clients who have retired, or are about to, probably have less to work with than they had a few years ago.
That’s not a problem for people who can delay drawing on the retirement nest egg until account balances recover–people such as retirees who have pension income that can meet their mandatory expenses.
But what about those who can’t wait?
All businesses know that there are two ways to improve the bottom line: increase revenue and/or reduce expenses. Advisors helping clients plan for retirement typically spend a lot of time focusing on the “revenue” or income side of the equation. While it is true that finding ways to maximize retirement income is a very important part of financial planning for retirement, this might be a good time to focus a little more on reducing expenses.
Reducing expenses begins with determining the current status.
For clients who use financial software to record bills and track expenses, this is a simple matter. Even if they aren’t currently using the budgeting feature of their software programs (and one might ask, why not?), they can create a budget based on their entries.
Clients who still use paper and pen for budgeting can follow the same process, although it will be a little more time-consuming and less accurate. It goes without saying that the end result is written budgets, something that many clients don’t have or, if they have them, don’t use.
Next, help clients examine their budgets line by line, categorizing their expenses as mandatory (mortgage payments, car payments, and utilities) or discretionary (eating out, vacations, and entertainment). Some software programs allow users to do this quickly and easily.
Then they can examine each expense, starting with discretionary items, to see which ones can be eliminated and which ones can be reduced.
What are some discretionary expenses that might be eliminated or drastically reduced? Examples that come to mind are yard services, housecleaning services, car detailing, book purchases, magazine and newspaper subscriptions, telephone landlines, fast food meals, and going to the movies.
Those first three items might be holdovers from preretirement, but retirees in good health might benefit from reassuming those chores. Eliminating weekly yard service and housecleaning, as well as periodic car detailing, could save thousands of dollars a year.
Now, that isn’t to say that reducing discretionary expenses means eliminating the little joys in life, but it does mean looking long and hard for alternatives to paying for them.
For example, public libraries have best-selling books and many magazines and newspapers, which also are available in free and convenient online versions. Many people who have cell phones have been able to eliminate their home landlines. With a little planning, one can prepare meals at home that are often faster, not to mention healthier, than going out to get fast food. As for movie viewing, renting a DVD for $4 or $5 is far cheaper than paying $8 or $9 a person at the theater.
Clients might be surprised to find that they can eliminate or reduce some of their “mandatory” expenses as well. Although people assume that it is cheaper to own a car or a home, in some cases, it might be cheaper to rent. For older retirees who seldom use their cars, taking advantage of transportation services that cater to seniors may make more sense.
Retirees who split their time between two homes, having a second home in a warm weather location for the winter months, might find it cheaper to have a long-term rental in one location versus paying expenses for maintaining two homes.
Another way to reduce mandatory expenses is to take advantage of the numerous discounts available to seniors. Many grocery stores give those over age 60 or 65 a discount one day a week. A 5% discount on $200 worth of groceries saves $10, or $520 a year. Seniors also receive discounts on prescriptions, utilities, and even property taxes in many locations.
The key is to find out about and take advantage of all the savings offered to seniors.
Advisors can be a key to a long and happy retirement by helping clients find ways to reduce their expenses, taking some of the pressure off of the income side of the retirement planning process. If clients can live comfortably on less income until their retirement accounts have time to recover, they will thank the advisors who helped them to reexamine their bottom lines.
Kristen Falk, FLMI, FFSI, AAPA, ACS, AIAA, AIRC, ARA, is a senior writer with LOMA in Atlanta, Ga., specializing in annuities and financial planning. Her e-mail address is email@example.com.