Have you ever seen a race where the lead runner stumbles at the final hurdle? I might be athletes. It might be horses. They were so close to victory. Tragedy strikes at the last second. Financial professionals might get the same feeling when a client who has carefully prepared for retirement, suddenly goes on a spending spree once they retire, Why does this happen? What can you do?
Here are a few contributing factors. Your newly retired client is bored. They have an ideal life. They are in good health. Their marital relationship is good. They have no debt. They have retirement savings. Anticipating 30 years in retirement, you have made the case withdrawing 4% annually is a conservative strategy and should provide a comfortable cushion for unexpected future expenses. So far, so good.
Meanwhile, the stock market has been doing really well in this scenario. Let us suppose it has been returning in excess of 10% a year. Your annual portfolio review meetings are filled with good news. Your client starts to wonder if withdrawing 4% is too conservative. They also develop a love affair with stock and the equity bucket in their asset allocation gets really overweighted. They are feeling rich.
This changes their spending patterns. First, they start taking more vacations. Those cruises that cost the couple $3,000 or so now become $10,000 cruises on ultra luxury cruise lines. They become major donors to charities, making multi-year commitments. They surprise their partner with expensive jewelry. They lease a luxury car.
Suddenly, their monthly expenses have ballooned. Your client is confident the stock market will bail them out. They wonder “What’s the point of having all this money if you are not enjoying it?” As their advisor, you see the plot for a disaster movie unfolding.
What can you do? You do not want to be “The guy who removes the punchbowl just as the party is getting started, yet your client has a serios case of “keeping up with the Joneses.”
1. Meet in person.
These are not phone or video conversations. This is a face to face meeting with both in the couple present. Your upcoming portfolio review meeting is a good time.
2. Rerun the numbers.
What are they spending now? What was the plan when you all sketched out what their retirement would look like? How long will their money last in a best, worst and average case retirement scenario?
3. Have others in their peer group suffered a setback?
It might be health related. It might be overspending. Who has dropped their country club membership or stopped doing the charity gala circuit? Why did this happen?
4. Long term care.
Your client couple are relatively young retirees. They are in good health. Unfortunately, this will not last forever. Who do they know that has “downsized,” moving to a retirement community with health facilities attached? What are the advantages? Do they think they will follow the same path someday? What does this cost?
5. Where is the money going?
What has brought their expenditure up? What categories does this fall into? These might include vacations, charities, gifts and others. Help them with the numbers.
6. They can still have fun.
The first step is setting up a new budget. This does not mean eliminating spending, but fitting it into parameters. They might have a vacation budget. Of $10,000. This might be one cruise at the $10,000 price point or three vacations at the $3,300 price point. This can get them thinking creatively.
7. Restructure charitable giving.
They will still want to attend charity galas. That should be fine. They do not want to appear “cheap” but they need to moderate future multi year pledges. Start by setting up a Donor Advised Fund. This can be a home for stock with a low cost basis, stocks they have held for a long time. Talk with the charity about plans to remember them in their will. This fits into the endowment category and make them happy. Now they are a member of the legacy society, yet they still should have ownership of their funds.
8. Plan to speak more often.
This will help keep them on track. You cvan take them out to lunch. This should help keep them from getting bored. They can tell their friends, which fit into keeping up with the Joneses. It might get you a referral or two.
Related: What Established Advisors Know (And New Ones Need To Learn)