Prepare clients emotionally for sound retirement budgeting
Should advisers tell clients to follow the rule of thumb and reduce their expenses by 30% during retirement?
“The idea of having to reduce one’s budget to fit into a pre-determined financial framework may create a sense of sacrifice that makes the prospects for the future look dim,” says Claudia Mott, a CFP and the principal of Epona Financial Solutions in Basking Ridge, N.J.
“On the other hand, when clients can be shown various what-if options that consider different expense and income scenarios, they are presented with choices,” she says. “Being given the opportunity to see how changes can positively impact the outlook for the future may be viewed as less of a sacrifice and more of a win.”
Kevin Meehan, a CFP and regional president of Wealth Enhancement Group in Itasca, Ill., advises clients to determine what is most important to them, which helps them avoid making overly emotional spending decisions.
Advisers shouldn’t suggest that clients reduce their spending by a pre-determined amount during retirement, as circumstances can change, says Catherine Seeber, a CFP and a partner and senior adviser at Wescott Financial Advisory Group in Philadelphia.
“In retirement, you may give up the fancy clothes because you no longer go to the office but your medical expenses go up,” she says. “If you hang your hat on a percent or a benchmark instead of doing long-term projections with realistic assumptions, you will always set yourself up for failure.”
Sarah Wotherspoon, a CFP and a principal at Private Ocean, an independent wealth management firm in San Rafael, Calif., says that she has never told clients to reduce their expenses by 30%.
Still, she has to inform some clients that they don’t have enough money saved to maintain their lifestyle during retirement. That can be tough if the client’s significant other feels differently about their financial options.
“One partner might say, ‘Yes, selling our home and moving would be no big deal,’ but the other might have a significant emotional attachment to the home they’ve raised their children in and have lived in for decades,” Wotherspoon says. “It’s helpful to approach them about these decisions as early as possible, because it can take months, or even years, for them to decide.”
But sometimes clients need to make decisions quickly, and Wotherspoon helps them through that process both by using their financial models to illustrate their options and helping them objectively weigh the pros and cons.
“With every financial decision, there is the economic element and the psychological element,” she says. “We consistently find that including both in the decision-making process results in the ‘right’ decision.”
This story is part of a 30-30 series on preparing for retirement.