You’re still in shock as your retired client gleefully recounts how he just bought a new 911 Carrera GTS for an amount that will consume a large chunk of his retirement portfolio. He also joined an exclusive and expensive local speedway’s drivers club so he can put the car through its paces a few times each year. The good news: You have an open invitation to join him at the track so you can experience the car’s top speed of 190 mph.
Admittedly, this is an extreme example of irresponsible spending. Retired clients with sufficient assets to hire a financial advisor don’t accumulate wealth by being foolish with their money. In fact, many continue to be frugal well into retirement, even though they could afford to loosen the purse strings without endangering their financial security.
The reality is that it’s the unexpected expenses that can throw a retirement plan off track, according to the advisors interviewed for this article. These advisors cite medical and care bills, home maintenance expenses and the need to replace cars as examples of expenses that are more likely than big-ticket spending spurges. Planning for those costs can help senior clients make smarter spending decisions.
The cost of care
Retirees’ potential medical care costs receive ample media attention. Fidelity Benefits Consulting’s 2014 report estimated that a 65-year-old couple retiring in 2014 would need an average of $220,000 (in today’s dollars) to cover medical expenses — not including long-term care — throughout retirement. Genworth’s 2015 Cost of Care Survey found that annual costs (national averages) range from about $18,000 for adult day care to over $91,000 for a private-room nursing home stay.
Anne Chernish, CFP with Anchor Capital Management, LLC in Ithaca, New York, has found that seniors frequently overlook the need to plan for some level of potential care as they age. When she brings up this topic during the planning process, she reports that sticker shock is a common reaction. For clients with sufficient assets and income, long-term care insurance is a possible solution. Other clients may wind up earmarking funds for potential care costs. “These higher-net-worth people would have pots of money that they could divvy up and say, ‘OK, well, I’m not going to spend that playing golf because I may need that to go to a continuing care community or something,’” she says. “So (they) divvy it up, manage it for some income, some growth, whatever they’re comfortable with and just don’t touch that pot and hope they don’t have to use it for that.”
It’s also easy to overlook the less publicized, uninsured medical expenses retirees typically incur, says Jim Atkinson, CFP with Columbus Capital in New Albany, Ohio. He cites out-of-pocket dental work, hearing aids and cataract lens replacements as examples of medical costs that many retirees overlook.
Giving it away
Jane Nowak, CFP with Wealth and Pension Services Group in Smyrna, Georgia, works on post-retirement budgeting and spending with her senior clients. She reports that some of the most challenging conversations come about when clients want to help their children or grandchildren with financial gifts without considering their own long-term needs first. In some instances, the urge to help is motivated solely by the senior’s generosity. In other cases, though, she cautions, a family member who needs money may view a parent or grandparent as “an easy touch.”
For some clients, it helps to set what Nowak calls a target band that specifies the maximum for gifts, such as x amount per year to any recipient or y amount in aggregate. “If I’ve got someone I know who’s really inclined to give money for a particular family situation or whatever, then I would definitely set a top limit,” she says. “Of course, the client does whatever he or she is going to do or wants to do… I try and help them understand that maybe there has to be a two-way street here or to realize that perhaps they need to be a little bit more conservative at times.”