Does this sound familiar? You have a retired client. Over the years, you have done a fine job with financial planning. They have an idea how long their money will last into retirement. Quite a long time! A rising stock market has acted like the wind at their back. Unfortunately, it has propelled them into higher spending. When spending exceeded cash on hand, they sold off some stock and paid their bills. Then 2022 arrived. Your client needs help. What can you do?
Why does your client need help? Inflation has driven up their household expenses. The stock market has not cooperated, with the S&P 500 declining about 20% in the first half of 2022. They are still overspending.
Everyone agrees diets make sense, but no one wants to be subjected to the discipline required. Ditto budgeting. What can you do to help your client live within their means without coming across as the guy who takes the punchbowl away, just as the party is getting started?
1. The positive side of rising interest rates. If your client has a cash reserve (bonds that matured, stocks sold) it makes sense to take advantage of the rising interest rate environment. What can they get in safe, fixed income instruments between six months and three years out?
Strategy: Make the case for building a bond ladder. If rates rise, they pick up the higher yield when the shortest bond matures. If rates do not rise or pull back, they have locked in some higher rates for a few years while they were available.
2. Where is their money going? If their checking account is with your firm, you should get a pretty good idea. Ideally you want to look over charge card purchases too. To the client, this can be similar to being told to write down everything you eat for a two-week period, then show it to a dietician.
Strategy: Your client likely worked in industry. Comparing projected versus actual expenses is a standard strategy. You aren’t looking to place blame, just identify areas of variation so they can be addressed.
3. Can the gap between income and expenditures be plugged? Your client might own rental property, which contributes to their cash flow. Expenses are up, but rents have risen too. Rents rose nationally about 11.3% last year. It’s been estimated Social Security payments could rise 10.3% in 2023.
Strategy: When leases are due for renewal, it’s logical rents should rise. That should help your client’s cash flow.
4. Can longer term expenses be reduced? Your client might be facing some significant cash outflows in the near future. It might be a luxury holiday, replacing their car with the latest model or adding an addition to their home. Can these expenses be deferred? Certain expenses like roof repair should not be put off. Know the difference.
Strategy: Push big ticket items out where possible.
5. Can debt servicing be reduced? Your client has run up their credit card bills and home equity line of credit. Rising interest rates immediately become higher monthly expenses.
Strategy: Banks are competing to offer your client new credit cards. The cards they have are offering attractive balance transfer rates. Can they reorganize their credit card debt to reduce their interest cost?
6. Switching from variable to fixed rate debt. Let’s revisit your client’s home equity line of credit. They might owe tens of thousands! If interest rates are rising, it makes sense to talk with their bank about converting to a fixed rate loan.
Strategy: Your client should talk with their bank, the one who issued the variable rate debt. They may have a process for transitioning the variable rate loan to a fixed rate loan. The line of credit will likely no longer exist, but they will know their future monthly payments and have a debt reduction plan in place to pay down that loan.
7. Reducing overhead expenses. Your client has several bills they pay every month, literally to keep the lights on. This includes their power bill, wireless charges, cable bill and household insurance bills. They might not have looked at them for years, but they are quietly going up.
Strategy: Shop around. Can they get better rates from competitors? Once they have a better rate, calling your current provider and telling them might get you a match.