Help Senior Clients Spend Wisely In Retirement

You're still in shock as your retired client gleefully recounts how he just bought a new 911 Carrera GTS for an amount that will consume a large chunk of his retirement portfolio. He also joined an exclusive and expensive local speedway's drivers club so he can put the car through its paces a few times each year. The good news: You have an open invitation to join him at the track so you can experience the car's top speed of 190 mph.

Admittedly, this is an extreme example of irresponsible spending. Retired clients with sufficient assets to hire a financial advisor don't accumulate wealth by being foolish with their money. In fact, many continue to be frugal well into retirement, even though they could afford to loosen the purse strings without endangering their financial security.

The reality is that it's the unexpected expenses that can throw a retirement plan off track, according to the advisors interviewed for this article. These advisors cite medical and care bills, home maintenance expenses and the need to replace cars as examples of expenses that are more likely than big-ticket spending spurges. Planning for those costs can help senior clients make smarter spending decisions.

The cost of care

Retirees' potential medical care costs receive ample media attention. Fidelity Benefits Consulting's 2014 report estimated that a 65-year-old couple retiring in 2014 would need an average of $220,000 (in today's dollars) to cover medical expenses — not including long-term care — throughout retirement. Genworth's 2015 Cost of Care Survey found that annual costs (national averages) range from about $18,000 for adult day care to over $91,000 for a private-room nursing home stay.

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Anne Chernish, CFP with Anchor Capital Management, LLC in Ithaca, New York, has found that seniors frequently overlook the need to plan for some level of potential care as they age. When she brings up this topic during the planning process, she reports that sticker shock is a common reaction. For clients with sufficient assets and income, long-term care insurance is a possible solution. Other clients may wind up earmarking funds for potential care costs. "These higher-net-worth people would have pots of money that they could divvy up and say, 'OK, well, I'm not going to spend that playing golf because I may need that to go to a continuing care community or something,'" she says. "So (they) divvy it up, manage it for some income, some growth, whatever they're comfortable with and just don't touch that pot and hope they don't have to use it for that."

It's also easy to overlook the less publicized, uninsured medical expenses retirees typically incur, says Jim Atkinson, CFP with Columbus Capital in New Albany, Ohio. He cites out-of-pocket dental work, hearing aids and cataract lens replacements as examples of medical costs that many retirees overlook.

Giving it away

Jane Nowak, CFP with Wealth and Pension Services Group in Smyrna, Georgia, works on post-retirement budgeting and spending with her senior clients. She reports that some of the most challenging conversations come about when clients want to help their children or grandchildren with financial gifts without considering their own long-term needs first. In some instances, the urge to help is motivated solely by the senior's generosity. In other cases, though, she cautions, a family member who needs money may view a parent or grandparent as "an easy touch."

For some clients, it helps to set what Nowak calls a target band that specifies the maximum for gifts, such as x amount per year to any recipient or y amount in aggregate. "If I've got someone I know who's really inclined to give money for a particular family situation or whatever, then I would definitely set a top limit," she says. "Of course, the client does whatever he or she is going to do or wants to do... I try and help them understand that maybe there has to be a two-way street here or to realize that perhaps they need to be a little bit more conservative at times."

Home sweet home?

Some seniors prefer to live in a community, but others prefer to age at home. Staying in the home can be an expensive option, however, cautions Niv Persaud, CFP with Transition Planning & Guidance, LLC in Atlanta. Older clients often overlook the costs of mobility upgrades and ongoing maintenance. She gives the example of a client with a two-story home who is having problems safely going up and down the stairs. A stair lift for a straight stair can cost from $2,000 to $5,000, she says, and up to double that amount for curving stairwells. Other possible modifications can include replacing bathtubs with walk-in tubs or showers. Before incurring those expenses, however, Persaud suggests clients consider how long they plan to stay in the home and whether they want to keep up with the property's required maintenance as they age.

Those home maintenance expenses can also bust the budget. A roof replacement will last about 15 years; water heaters can break down after 10 years. While the client might be able to manage these individual expenses without too much difficulty, the cumulative cost can be a strain. The need to replace an aging car has the same impact. "These are just things that might be $1,000 here, a couple of thousand there, but it adds up and can eat into your budget if you don't at least have that saved up or built into your retirement plan," says Persaud.

Assuming the senior wants to sell the home at some point, keeping up with current lifestyle and decorating trends increases its marketability, but those renovations are also expensive. Atkinson points out that kitchen appliances, cabinets and countertops that were popular 20 years ago are very dated nowadays. That means even retirees aged 65 who update their kitchen will have a dated kitchen and worn-out appliances by age 85. In today's dollars, a kitchen update can cost $20,000, he notes, and that's before projecting for inflated future costs.

Planning strategies

One approach for avoiding cash flow strain with these expenses is to budget and save for them. It's essentially the same process as a company's capital expenditure plan, says Persaud. "You can create a plan for your home in that same manner, a maintenance plan for your house that will help keep things in check," she says. "That way, you're not spending too much money during one year that's going to impact your lifestyle spending."

Atkinson takes a similar approach. Although the exact timing of uninsured medical costs and home repairs is imprecise, they will come up at some point. Because the expenses are largely inevitable, he suggests that clients structure their portfolios accordingly. "You don't want to have two or three of those (expenses) come in the same calendar year if most of your money is sitting in qualified funds because that's where the planning issue comes in," he says. "Because many retirees did the right thing, they saved in their company 401(k) plan and many of them have the preponderance of their wealth in qualified funds. If you're just trucking along living your life and then you have a kitchen, a roof, a carpet, a car and hearing aids or periodontistry in the same timeframe, the next thing you know, you've moved up a level in (tax) bracket. Your Medicare premiums are higher for the next two years because they're means-tested. It requires planning and you should set aside enough for one of those in any given year."

Tapping home equity

We don't normally think in terms of spending home equity, but it is a major asset for many seniors. Tom Davison, CFP with Summit Financial Strategies in Columbus, Ohio says that seniors are best served if they can combine their normal spending plan with a contingency plan. Living 20 to 40 years in retirement is likely to produce some bumps in the plan, he observes, and accessing home equity can help cover those contingencies.

Davison has researched and written extensively about reverse mortgages. In the right circumstances, he says, retirees' lifetime spending "can be raised 60 percent to even 100 percent by using reverse mortgages strategically with planned portfolio withdrawals." Reverse mortgages can be set up to provide regular income or as lines of credit. Clients' circumstances will influence the decision of which to take, he says. Receiving a monthly income offers convenience, for example. "It doesn't take any adjustments along the way, and I think that's easy for people to live with and easy for advisors to set up," he says. "The line of credit is more flexible and can require a few more decisions along the way. Another use is actually refinancing mortgages… That's sort of a set-it-and-forget-it kind of mode, as well, and that's a natural for people who have a mortgage that can be refinanced."