Financial advisors have a unique opportunity to help their clients prepare for retirement by projecting future financial needs and available financial resources, then constructing a plan for helping them to achieve their retirement goals. But regardless of how meticulous your planning work may have been for a client, you can’t control how much they spend once retirement arrives.
Unfortunately, once a retiree begins drawing down their assets, a miscalculation in how much they spend each month can have a significant impact on their quality of life in the golden years. For some clients, it can force some difficult decisions to scale back travel plans, seek out alternative medical providers or even consider selling a home.
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The fact is that some of these retirement budgeting errors are caused by overspending on discretionary items, some are the result of mistaken spending assumptions and others are caused by unexpected financial burdens that could not have been anticipated. Here are five common budgeting mistakes that your clients are making after they enter retirement:
Advisors have a pretty keen sense of which expenses will go down and which ones will rise in retirement, but many of your clients are surprised at how much their entertainment spending increases once they stop working. With weekdays suddenly wide open, they tend to fill that time with more leisure activities such as lunching out with friends and spontaneous road trips. This is great for their quality of life but can create budget management challenges if your planning work assumed lower levels of spending. However, there is no need to assume that a surge in post-retirement spending on entertainment will continue at that rate; federal government data indicates that entertainment spending declines with age.
- Health Care
Many of your clients view Medicare as the complete financial solution for their medical expenses in retirement. After all, they know they’ve been paying into the system for decades, so it’s reasonable for them to assume that now is their time to claim that umbrella insurance coverage. Unfortunately, health care expenses typically increase as your clients age and Medicare rarely covers all of the prescription drug expenses, out-of-pocket expenses and dental bills they will face in retirement. These combined retirement health care expenses were projected at $275,000 per couple in a report last year, an amount that will exceed many retiree budgets.
- Home Improvements
During your clients’ working years, they eventually came to understand that unexpected miscellaneous expenses are just a fact of life for homeowners. We all tend to factor in those unwelcome surprises as part of our routine annual household budgets. But for some reason, many retirees fail to properly budget for occasional emergency expenses (e.g., a new roof) and even routine home repairs. This item can also be a retirement budgeting mistake for your clients who choose to downsize to a smaller home or relocate to a new community. Moving expenses add up quickly and most retirees want to spend some money to make some custom improvements to their new residences.
- Family Support
This is a surprisingly common retirement budgeting challenge. It’s one thing for a retiree to make personal sacrifices and cut back their own expenses if their spending is exceeding their financial plan, but most of us know how tough it is to say “No” to one of our children or grandchildren when they’re in a bind.
In fact, one study found that approximately one-third of households include adults being financially supported by their parents in some way. The instinct to help your family members is natural and the generosity to provide them with financial aid is honorable, but the fact is that many of your clients are imperiling their own retirement funds by spending far more money in this area than their budget can tolerate.
- Life Expectancy
The good news for your clients is that advancements in medicine and changes in individual behavior have led to greater longevity than what they likely anticipated when they were in their youth.
For example, in 1968, the average American could expect to live 69.95 years; by 2015, life expectancy at birth had increased to 78.74 years. As encouraging as this is for those of us who want to cherish as much time as possible with our loved ones, it also means that your clients need to be budgeting properly to anticipate the need to finance a retirement that could last longer than they imagined. The average 65 year-old American is likely to live an additional 19.4 years, according to the National Center for Health Statistics, so retirement budgets need to reflect this reality.
Budgeting mistakes during the working years can deal a blow to our financial plans, but we generally have enough time and physical ability to recover from some poor decisions. For your clients living in retirement, though, budget mistakes can have more serious consequences. If your client’s retirement funds have been unexpectedly drawn down and they find themselves in need of a cash infusion, one option that might be available to them is to unlock value that is tied up an unneeded life insurance policy.
Any qualified life settlement professional will be happy to review your client’s policy and provide you with a preliminary idea of whether your client might be able to sell the asset for an immediate cash payment. Please visit www.LISA.org to identify licensed life settlement providers and brokers who may be able to assist your client.
— Read Helping Your Clients Afford a More Expensive Retirement, on ThinkAdvisor.
Darwin Bayston is the president and CEO of the Life Insurance Settlement Association.