Retirement budgeting is a constant problem for advisors and their clients. How do you estimate in advance how much a retiree will want or need to spend?

Can you trust clients to be honest about their expenses? It's natural to try to turn dreams into reality, such as overestimating travel costs and underestimating health care.

Experienced advisors have learned a few tricks and warning signs.

“A retirement plan is a blueprint based on various assumptions,” said William Bernarduci, a partner at Bolvin Wealth Management Group in Boston. But, he cautioned, “retirees tend to underestimate their expenses.”

So he suggested starting with a baseline, using credit card statements and bank accounts to establish the cost of each client’s current lifestyle. “Once you have the baseline plan in place,” he said, “you can include additional what-if scenarios for various retirement objectives,” such as extra travel or a second home.

“People forget to take into consideration the power of inflation, or they put in too high a rate-of-return estimate on their investments,” said Brett Bernstein, CEO and co-founder of XML Financial Group in Bethesda, Md.

It’s also not uncommon to underestimate taxes on Social Security benefits, pensions and required minimum distributions, he said. “Some less experienced advisors don’t understand how pensions and Social Security benefits may change when one spouse dies, thus changing the income,” he noted.

Perhaps the most frequent area of undercalculation is healthcare expenses, including insurance, said Spencer Betts, a principal at Bickling Financial Services in Lexington, Mass. “Health insurance emerges as a significant transition point in retirement,” he explained. “While individuals have limited health insurance options during their working years, retirement offers a plethora of choices. This often proves to be where individuals miscalculate their budgetary needs.”

Medicare isn’t free, after all, nor does it cover 100% of health-related costs, he said.

Different stages of retirement tend to have different types of expenses. In early years, people are more likely to travel. Later, they might relocate to be closer to children and grandchildren. As they age, though, medical expenses typically become a greater drain on income and savings. “It's imperative for advisors to understand how expenses evolve across these stages and adjust their budgeting strategies accordingly,” said Betts. “While we can plan for the future, we must also be prepared to navigate its uncertainties with agility and resilience.”

Many retirement budgets also lowball home maintenance expenses, said David Zuckerman of Zuckerman Capital Management in Los Angeles. “A lot of homeowners budget 1% of home value annually for maintenance, but the actual number can wind up being quite a bit higher for older homes."

Healthy Skepticism
Another common mistake that inexperienced advisors might make is “believing everything your client tells you,” said Skylar Riddle, an advisor at Fort Pitt Capital Group in Pittsburgh and Harrisburg, Pa. “They are not being intentionally deceitful, but it is your job to question and scrutinize their budgets and goals.”

For instance, he said, a retiree homeowner who no longer has a mortgage might forget to budget for property taxes. “It’s safer to overestimate than underestimate,” he said.

“Don’t assume you have all your client’s money,” added David Byrnes at Security Benefit in Topeka, Kan. “To establish an appropriate retirement plan and the right income strategy, you need to know where all investments and other assets are situated, plus all potential income sources.”

As a rule, clients assume they can live on less in retirement, though most don’t want to change their lifestyle. “They fail to realize that once you retire, it is unlikely you will be satisfied staying home all the time and reading library books,” said Kate Yoho at TBH Advisors in Brentwood, Tenn.

“In retirement, the one thing you have is time,” as Harold Evensky at Evensky & Katz/Foldes Wealth Management in Miami and Lubbock, Tex., put it. “Time can cost money.”

Managing Risk
Risk management is another often overlooked area, said Michael Green, a managing director and senior wealth advisor at GYL Financial Synergies in Parsippany, N.J., citing market volatility and inflation.

Clients might also underestimate their life expectancy—known as longevity risk—and how long their retirement savings may need to last, he said. They often don’t optimize their Social Security either, he continued, “claiming benefits too early or failing to consider spousal or survivor benefits, [which] can significantly impact overall retirement income.”

To make retirement budgeting more accurate, Lisa Featherngill, national director of wealth planning at Comerica in Winston-Salem, N.C., suggested a close examination of the client’s spending using apps or programs like Credit Karma and Quicken. Some expenses won’t be recurring in retirement, such as tuition, but others such as travel may increase, she said.

“Evaluate how expenses will change in retirement and come up with a preretirement run rate and an expected retirement run rate,” she advised.

This kind of careful analysis of each client’s situation, run periodically, is better than employing a rule of thumb such as the standard 4% withdrawal rate to “determine how much of the portfolio needs to be liquidated each year to cover expenses,” she said.

“No one spends the exact same amount every month,” agreed Ken Robinson, founder and president of Practical Financial Planning in Rocky River, Ohio. “Everyone should take into account the circumstances that make their retirement unique.”

Sticking To A Budget 
For most clients, making a budget is hard enough. But sticking to a budget can be even tougher. “It’s similar to working out, dieting, or anything else that requires hard work and discipline,” said Charles Weeks Jr., founding partner of Barrister, an investment advisory practice in Philadelphia.

Many clients neglect to take regular distributions from their assets, said Matt Wion, a senior vice president at New York Life in New York City. 

Instead, many curtail what they spend to match what they expect to receive in income. “This unnecessarily constrains spending and, as a result, [detracts from] lifestyle in retirement,” he said.

Client habits are often ruled more by emotion than practical considerations, he said, and advisors “would do well to tune into the behavioral biases driving their clients’ financial decision-making.”

Client resistance can cause some advisors to shy away from the necessary in-depth conversations, said Kelli Smith, director of financial planning at Edelman Financial Engines in Raleigh, N.C. But retirement budgeting isn’t about being strict, she emphasized; it’s about guiding clients to become more self-aware.

“A budget is a tool of empowerment,” she said.