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The Importance of Anticipating Expenses for Retiring Clients


Do you have clients who are planning on retiring soon? If so, they need to keep in mind prices will rise in the future and plan accordingly. This is where you can help.

Feb 4th 2020
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COLA. It’s one of the nicest words in the English language. We are talking Cost of Living Adjustments, not soft drinks. Although Social Security might have a provision to keep up with inflation, bonds do not. That’s why they are called fixed-income investments. Let’s add annuities into that category. Your retiring client needs to realize prices will rise. You can help them plan for this eventuality. 

What’s the Bottom Line?

Retiring clients have a lot to learn. They must plan carefully before retirement. They must learn to live within their means because they aren’t earning an income, complete with bonuses each year. Income from investments needs to be projected in a conservative way. When times are good, we think it will last forever. Keep an eye on your expenses. They will creep up.

How Does Your Client See Retirement?

Clients often see retirement through rose-colored glasses. They stop working and start collecting benefits. With the demise of defined benefit pension plans and the conversion of some company plans into annuities with an insurance company, the fixed payment clients collect will likely not cover their expenses.

You’ve helped them. They have investment assets in both taxable and tax deferred accounts. With interest rates low and a 10+ year old bull market in stocks, they likely have a blend of stocks and bonds. You’ve worked with them to project furure income. Less tactfully, will they outlive their assets?

Fixed Expenses – They are with You Forever

Back to those rose-colored glasses. Some clients think consumer prices will remain reasonably stable forever. If only wishing would make it true. Clients need to keep an eye on fixed and discretionary expenses. They need an idea of how they will behave.

Fixed expenses are ones you’ve got to pay, period. This includes housing costs. They might own their own home, but they pay property and school taxes, they pay power bills. They buy heating oil. They need to be mindful property needs maintenance. It’s been said homeowners should allocate one percent of the property’s value to keeping up their home. Appliances periodically need replacing.

Clients also need to consider medical expenses as part of those fixed expenses. Although they may be covered by Medicare, they likely have a supplemental plan and a drug plan they pay themselves. Dental insurance is often not covered.  In addition, unless the client comes from a large family with a tradition of intergenerational care, they will likely need some form of assisted living care in the future.

Clients need to be reminded of the rule of 72. A rate of interest divided into 72 yields the number of years it takes for that number to double. More on that later.

Let’s look at different interest rates connected to your client’s expenses.

  • Official inflation rate:                Projected at 1.90% for 2020.
  • Historical inflation rate.             1990’s: 3.08%.  2000’s:  2.54%   2010’s: 1.80%
  • Health care inflation rate.           10.7% (April 2018-19)
  • Property tax inflation rate.          Seattle: + 14% 2017-18.  DFW +8% 2017-18
  • Long term care inflation rate.    +3.00% - 6.67% Nursing home/senior living 2018
  • College tuition inflation rate.     + 4% before adjusting for inflation.

Let’s go back to the rule of 72. Suppose your town requires a referendum if school taxes were raised more than 5 percent a year. It’s a safe bet they will increase just under 5 percent every year. Using the rule of 72, those taxes would double in 14.4 years and quadruple in 28.8 years. Your 65-year-old client will be 79.4 and 93.8 respectively. Quite a problem if you are on a fixed income.

Clients need to keep an eye on expenses and have a strategy to grow their assets over time.

Discretionary Expenses – Places Where You Have Scope to Cut

Discretionary expenses are different. You can shop around or choose to eliminate them. Clients can take less vacations. They can shop for better cellphone plans. They can downsize from fine dining to casual restaurants. This will not impact their lifestyle significantly.

Why was college tuition listed earlier? Clients may have promised to pay for a grandchild’s college education. They may have a boomerang child of their own, returning home and needing training for a new career path. They may feel an obligation to help. Clients need to understand the impact of these promises on their retirement lifestyles, especially if they will be requiring senior living or nursing home care themselves.

As their accountant and financial planner, you can help them plan for these eventualities.

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