Retirees who are spending too much of their hard-earned retirement money need to understand the consequences, warn financial advisors who participated in a Financial Advisor magazine retirement survey.
“What do they think is going to happen if they continue to withdraw 10 percent a year from their portfolio?” asks Gale K. Zumpano of Members Financial Services in Tuscaloosa, Ala.
Zumpano tries to get clients to see the consequences for themselves rather than telling them to stop spending so much, then they can work out steps to make necessary changes together.
That is one solution to overspending proposed by the nearly 1,800 advisors included in the 2014 FA Retirement Survey. This is the fourth in a series of stories on the results of the survey.
“It can be a delicate operation to get clients back in line if they are spending too much,” she says.
“But most people who seek help from a financial planner are looking for direction and want to be responsible,” says Jim Butler, president of Butler Associates Financial Planners Inc. in St. Louis. “If they want help, we make a list of where they are spending their money and then we prioritize.”
Most advisors report that the majority of their clients are spending within their means. Slightly more than one quarter of advisors say 90 percent of their clients are spending in a way that is sustainable for their investments. Another 27 percent say 80 percent to 90 percent of their clients are spending in line with their portfolios.
The FA survey also shows that 19.6 percent of advisors have between 70 percent and 80 percent of their clients who are spending appropriately. An almost equal number, slightly more than 10 percent each, have 45 percent to 60 percent or 60 percent to 70 percent spending within their means. Only 6.6 percent of advisors have 40 percent or fewer of their clients spending sustainably, according to the FA survey.
Carol Alexander, executive vice president at Retirement Investment Advisors in Oklahoma City, Okla., says most of her clients who are overspending are doing it because they are not paying attention to daily costs.
“Some people just do not have good spending habits. Unless people want to change those habits, they are not going to manage to do it,” says Alexander who has more than 90 percent of her clients spending appropriately.
“Setting the client’s expectations is 80 percent of the battle,” says an advisor in Ohio with more than 20 years of experience, who asked not to be quoted by name. Between 80 percent and 90 percent of his retired clients are spending in line with their portfolios.
If an advisor knows the client well, she usually gets some warning that the client is spending too much even before retirement, says Kathleen Kee of Confluence Wealth Management LLC in Portland, Ore. More than 90 percent of her clients are spending appropriately.
“If you have worked with someone for a number of years, you know ahead of time it is going to be an issue that you have to work on,” says Kee. Solutions that can help solve the overspending problem include having the client work longer before retiring to build up more of a nest egg, or having them work part time in retirement. Clients can also do a little belt tightening. “It’s a combination of these three things.”
How much the retiree can spend depends on the withdrawal rate from the portfolio, and most advisors set that rate conservatively, but many adjust the amount each year. The largest group of advisors, 44 percent, set a withdrawal rate for their retiree clients of between 4 percent and 5 percent of their portfolio adjusted for inflation.
The next largest group, 38 percent, adjusts the withdrawal rate each year, depending on the individual’s circumstances. Almost 16 percent set the rate based on other factors, and only 38 of the 1,766 advisors surveyed (2.2 percent) have clients withdrawing more than 5 percent of their portfolio value a year.
Most of the Ohio advisor’s clients are withdrawing 3.5 percent to 4 percent, unless they retire at a young age, which could make the withdrawal rate even lower.
“So much depends on what happens in the first two or three years of retirement. If the portfolio starts to lose value, the client needs to be prepared to make adjustments,” he says.
Courtney L. Livingston, financial associate with Thrivent Financial in Watertown, S.D., adjusts the withdrawal rate each year, depending on how the client’s family is changing and what their risk tolerance is at that point. He makes those judgments by meeting regularly with clients.
Alexander, the Oklahoma City advisor, says a 4 percent withdrawal rate works for most of her clients except for those who retire early and need a more conservative rate to make the money last.
“When I got into this business 14 years ago, the average withdrawal rate was 6 percent, but that has changed for most people,” she says. Her clients have a wide range of investable assets from $500,000 to $10 million.
With 80 percent to 90 percent of his clients spending on a sustainable level, Butler says, he has periodic reviews with clients every six months or so to adjust the withdrawal rate if necessary.
“I look at how inflation is impacting the client’s cost of living and look at their investment returns. If it is a bad investment return year, such as 2008, I encourage them to cut back on discretionary spending to minimize the withdrawal rate and give the portfolio time to recover.”