When an advisor sits down with his clients, he might go over investments and insurance coverage as part of a holistic retirement plan. According to Dave Henderson, if the advisor wants to provide the full breadth of financial advice to clients, then he needs to address life events like weddings and college tuition as well.
Henderson, CFP, ChFC, CLU, based in Greenwood Village, Colorado with Client One Securities, has long given advice on life events to clients, but it hit him on a personal level earlier this year, when planning for his own daughter’s wedding.
According to the Wedding Report, the average wedding in 2015 cost $26,601, which does not include the cost of the honeymoon. Henderson helps clients prepare for expensive events well in advance of their occurrence in order to eliminate emotional, possibly bad decisions that can wreck their retirement … before they even get there. Retirement Advisor discussed the process on how he approaches these topics with clients and what the consequences are if not thoroughly planned for.
Retirement Advisor: So how do you bring up the topic of a wedding, what does that fall under when helping someone plan out their finances?
Dave Henderson: It’s in the general financial planning realm. You have college costs, retirement costs and wedding costs. When I first meet with clients, we discuss their income, assets and when they want to retire. I’ll ask: “Do you have any future assets that you expect or any inheritance? What about future expected expenses?”
RA: Do you think parents, who don’t work with an advisor, don’t think to save for a wedding?
Henderson: A lot of parents who I talk to already have that thought in their mind. Some will say “I want to pay for college so my child will come out of school debt free.” Others say they want to pay for their child’s wedding as a good send off. Others will say “I find my retirement more important so I’ll contribute a little bit.” So I think it’s in the back of their minds.
RA: Do you bring it up with all of your clients?
Henderson: It’s something I bring up, and I council my clients to set the budget. It really removes a ton of stress.
RA: Why do you think parents are willing to give to their kids at the expense of their retirement?
Henderson: It certainly depends on the family. But I think a lot of parents want to make sure their kids, particularly their daughters, have this dream wedding they’ve always wanted. Unfortunately, there are examples of parents pulling money from their
retirement accounts or actually stopping contributions to the accounts in order to pay for the wedding. I think that’s a terrible idea.
Ultimately, you want to make sure you can take care of yourself and you’re not going to be a burden on your kids. And people know spending a lot of money on a wedding is not a good way to make sure your retirement is going to be secure.
RA: Have you seen someone run into trouble from spending too much money?
Henderson: We know someone who had an $80,000 wedding — that’s just crazy for one day! We know the daughter as a friend, but I don’t know exactly where the money came from. I have to imagine it created some kind of financial drain. If you take $80,000 out of any pot of money, the potential of what it could have grown to is much larger than the $80,000.
RA: Should clients be putting away money in a savings account, or how should they be preparing?
Henderson: It depends on the situation. A credit card is really a bad way to pay for most any large expenditure. I think a case can be made to use home equity. I also think it’s a good idea to use a cash value life insurance policy because you can borrow that money from the insurance company and they put a lien against your policy. Usually, it’s at a pretty competitive interest rate. You can pay it back, and, with most policies, you’re not going to lose a lot of growth.
RA: How does the policy work in this case?
Henderson: Let’s say the client has a $100,000 cash value in their policy, and they want to borrow $25,000. They borrow $25,000 from the insurance company and put a lien against their policy, depending on whether it’s whole or universal life. Then, they can actually pay that money back into the policy, and they remove that lien or reduce it as they go along. With a lot of polices, you end up right back where you were without losing growth.
RA: What about using home equity?
Henderson: Sure. Another good way to come up with some money is dipping into a home equity. If they don’t already have the money available in a savings account this could be a good option. But clients have to be careful because with rising interest rates, that option could potentially be less appealing here soon. It’s mainly about planning early and making sure those sources are available.
RA: Say someone did take a loan out from their 401(k) account, what would be the consequences to that?
Henderson: If they have a 401(k), most have a loan provision to borrow up to a certain percentage of the account balance or $50,000. They have to pay that loan back. If they don’t pay it back and leave work for whatever reason or are under the age of 59 and a half, it could become potentially taxable. There could also be less growth because the money is out of the account for a certain period of time, which ultimately results in less money for your retirement.
RA: With weddings, why do you think it’s easier to wreck a retirement income?
Henderson: Emotion can play a larger role in a wedding than it does, for example, in a college education. That’s more of a financial decision where you say “well geez, we’re going to contribute a little bit to your college and you’re going to have to take out loans for the rest.” When it comes to a wedding that seems to be more of an emotional decision-making process from the conversations I’ve had with numerous people. We don’t always make good decisions, whatever it is, when emotions are involved.
RA: What are some of the biggest financial pitfalls people run into if they aren’t pre-planning?
Henderson: The sandwich generation is a common pitfall, specifically when taking in adult children. We had a friend whose child came home and didn’t want to work. Luckily, she is working now but that could have become a huge problem. Adult children can financially drain any parent.
Another pitfall would be in leaving your money out of the market. If you don’t start saving until you’re 40, you’ve given up 15 to 20 years when that money is not growing for you.
Once that pattern of not saving is in place, people begin making emotional decisions with their money: They pull their investments out of the markets at the first hint of an economic downturn. That’s an emotional decision that can cost you a happy retirement.