All financial professionals will probably agree the most important client goal should be retirement planning. Most clients buy into this idea. They understand Social Security is a component of future retirement income, not the replacement for their pre retirement earned income. The message that is a “tougher sell” is the cost of living will rise during their retirement years. How do you get this message across?
First of all, we do not know how long we will live. If you have money, live inn the US near a major metro market and don’t have serious vices, you could live a very long time. When we think of our parents and grandparent’s lifespan, medical science has been able to extend out lifetimes. Having good genes helps, of course.
Our financial advisor took us through the financial planning process years ago. She has each of us living to at least age 100. When my wife is feeling under the weather, I reassure her she will get better. I explain “Our financial plan has us living to 100! You have plenty of more years to go! If your client retires at age 65, they might have a full third of their lifetime left!
Let us assume your client lives at home, owns their home and doesn’t have lots of debt. Their savings and investments will supplement their social Security and any annuitized income they will collect. Once they retire, they will might likely be described as on a “fixed income.” (Hopefully their assets continue to grow, increasing their income.)
Is your client confident their expenses in retirement will stay under control? Have you tried to explain costs like health care will go up, along with property taxes? Have you found this to a tough sell?
Here’s the solution: Send them to the grocery store. Although the official inflation rate is 3.4% (1) your client will likely be aware prices on everyday items like beef and coffee are up substantially. Imagine if prices continued to rise like that during their retirement! Ask them to keep track of how much they spend on groceries every week.
What is it costing your client to go out to dinner? Let us assume they do “date night” once a week. What are they spending? How does it compare to what they remember from previous years?
How about everyday services? I take my dry cleaning to the store on Wednesday, to take advantage of the 30% Wednesday discount. I was surprised to see the “before discount” price on getting my suit cleaned was $35! Getting a sports jacket cleaned was about $24!
Ask your client to keep track of their everyday expenses for a month or so. How much have they changed relative to the prices they were used to be paying? You might explain certain prices like gasoline are cyclical in price, where others like services and groceries, tend to head in one direction. Upwards.
Could your client cope with household expenses rising so much, so fast if this continued into retirement? The answer is probably no. They would not be able to afford the kind of retirement they had in mind (travel, golf, leisure). This reinforces the need to save more aggressively during their working years. The worst case scenario, if prices don’t continue to rise so fast, is they will have more disposable income when the have the time to enjoy it.
