Prepare Clients for Spending Changes in Retirement

Many of you have helped your clients, generally, prepare for retirement, but have they given thought to how their spending will change once this happens?

and annual bonus. When they filed their taxes you let them know if they were getting a refund or needed to send in an additional payment. Self-employed clients made estimated tax payments on a quarterly basis.

This may change in retirement. If they are taking distributions from their retirement plans, their financial services firm should ask what percentage they want withheld. Although the focus of this article is on personal expenses and overhead, as their accountant you will discuss taxes they will be paying in retirement and how they will be paid.

The Low Budget Fantasy Is Actually a Nightmare

Your client might have mentioned they feel their monthly spending will plummet in retirement. They apply the logic that commuting expenses are gone and they won’t need any new suits.  Their dry cleaning bill will literally vanish. They will be eating lunch at home instead of buying lunch in the city. Of course their expenses will plummet.

Remind clients they’ve seen this movie before during the pandemic lockdown of 2020. Restaurants were closed. Cruise ships stopped sailing. Foreign borders were closed. During the most extreme months, your client stayed indoors, ate three meals a day at home and only left then house for grocery shopping and doctor appointments. Did their spending drop during that time? Yes! Is that how they envision spending the next 30+ years? Absolutely not! They would go insane from boredom. 

What Will You Realistically Spend in Retirement?

You and your client have done financial planning. If not, you should, so they understand what the future might hold. Fidelity has done research showing people spend 55 percent to 80 percent of their pre-retirement income during their retirement years.

The benchmark has often been 80 percent, but fidelity goes into more detail. They contend a person earning less than $50,000 a year will be spending $40,000 or 80 percent of their preretirement income after they hang up their spurs. People earning over $50,000 to below $120,000 will be spending 70 percent to 75 percent. Those earning over $120,000 annually will be spending 55 percent to 65 percent.

Here’s what makes Fidelity’s analysis compelling in my opinion: Just because you earned plenty during your working career doesn’t mean you have a huge appetite for spending in your retirement years. A lot depends upon what your clients see themselves doing in retirement and what those activities will cost. This is an area where your financial planning expertise can add value.

Expenses They Should Expect to Increase

Your client might not think costs might balloon in retirement, but there are several areas that will probably rise sharply.

1. Health care costs. You know these grow faster than the officially stated rate of inflation. Your client is covered by Medicare (or will be) yet they will need a supplemental plan and a drug plan. These will rise as they get older. The really serious costs will occur if one or both need skilled nursing care in a senior living facility. It’s a grim thought, but they must be prepared.

2. Travel. Let’s get onto a happier subject. Your client will get bored pretty quickly. Their friends take cruises, fly overseas or drive across the country in a motor home. Your client will want to do the same. Have a conversation with them about their ideal travel plans. It’s likely plenty more than they did during their working life. Put a price tag on these trips or better yet, establish a budget.

3. Dining out. Think back to the pandemic lockdown. Dining at home seven days a week got very boring, very quickly. Remember hoe everyone rushed out when restrictions were lifted? Thank goodness for outdoor dining! Your client probably dined out once a week during their later working years. Expect they will now bump that up. Now it’s two or three nights a week. Attach a price tag.

4. Entertaining. Maybe your client didn’t have much time to entertain during their working years. Now they have plenty of it. They may encourage the children and grandchildren to visit or have their golf buddies over. Put a price on that.

5. Property taxes. Your client pays school taxes and property taxes. These tend to gallop ahead year after year. This is an expense, generally speaking, you can’t control. One day, they might decide to downsize, but let’s not put too much on their plate yet.

6. Gasoline/transportation. It’s not a large expense in the big picture, but as long as they’re able to, the costs of fuel and transportation will be a factor in your clients’ lives.

Expenses Likely to Decrease

It’s time to lighten the mood. Yes, your client will be saving money in several areas.

1. Mortgage is paid off. At last! That 30 year mortgage on their house is paid off! They are still paying and house insurance property taxes, but a big bill has disappeared or will soon.

2. Immediate work-related expenses. This aligns with your client’s original thinking. No more monthly commuter rail tickets. They won’t need any new suits unless their weight changes dramatically. Those suits they aren’t wearing won’t be going to the dry cleaners.

3. Gym/health clinic membership. Good news! There are rates for seniors! They will want to keep getting exercise somehow.

Expenses Likely to Stay with You Forever

Many of your client’s expenses are fixed. Their employment status has changed, but their life still goes on.

1. Property maintenance. It’s been estimated you should put 1 percent to 4 percent of the value of your property into maintaining it. This is an expense you might have deferred during your working career. No longer as this fixed category can include lawn mowing services, tree work and snow shoveling.

2. Utilities. You will still have a power bill, heating bill, phone bill and cable tv or internet access bill. These will likely be unchanged from your working years.

3. Lunches out. You expected this category to drop. It probably won’t because of boredom. You will shop more, even if it’s walking around the mall. This will find your client away from the house at meal time, especially meeting up with friends for lunch.

4. Club membership. At last, you have time to use the club facilities more! You paid membership dues during your working life. This expense will likely continue at the same level, but (hopefully) you’ll get to use the facilities even more.

Conclusion

The object will not be to scare your client, but to help them anticipate and prepare for future expenses. They succeeded in their business career and can now afford a comfortable retirement. They should project their future spending the same way they did during their business career and, more importantly, you can help with their financial planning.