Advisors help clients plan for retirement, providing the best strategy on overall income inputs: Social Security, savings, 401(k)s and pensions. But what happens when these funds still aren’t enough to cover retirees’ costs?
Steve Vernon, author and scholar with the Stanford Center on Longevity, outlined several steps advisors can recommend to clients to help bring down their expenses, in a recent interview with ThinkAdvisor.
“Once [clients] have a picture of their total income, then they can say, ‘Here’s how I need to bring my living expenses down.’ Too often people use their 401(k) accounts like a checking account rather than have a paycheck generating strategy,” Vernon said.
“So once they get the idea of what a lifetime paycheck will be from Social Security, a pension, 401(k), then that shows a target on how to spend the income.”
He says that people have “just run out of money” in their late 70s and early 80s, thus decisions on how to curb spending should happen before that. But where should they cut?
“I hold planning workshops and hear people who say, ‘I’ll go to Starbucks less often or I’ll cut out cable.’ But if they have a big gap, they’ve got to look at big targets, and housing is still the largest expense for most people in retirement,” Vernon said.
He cites a Boston College Center for Retirement Research study that shows about three-quarters of older people had more wealth in their home than in their IRAs and 401(k)s.
Once a family is raised and gone, and a client is retired, “I’m a big advocate of at least taking a good, hard look at the house and community [that clients] live in, and make those changes,” he said.
By selling their home, they can realize the capital gain, downsize to a less expensive home and “deploy the net proceeds to generate retirement income,” he explained.