Recently, I had a meeting with a client who had retired about two years ago. A few years before he retired we restructured his portfolio to match his changing goals and objectives. At the time we developed the strategy the client said that they would need $4,000 to $5,000 a month to cover all their expenses and that also included vacations. The problem is that the client is two years into retirement, and it doesn’t cost him $4,000 to $5,000 a month; it’s more like $6,000 to $7,000 a month.
When I recently sat down with the client to discuss his new spending habits, I was sort of surprised at his answer. As he explained, he knows that he’s spending more than he should and he knows he’s somewhat jeopardizing his future. However, as he said, he is enjoying his retirement and doesn’t want to make any changes. My response to him was that since he doesn’t want to control his spending, the only other way he can maintain his lifestyle, throughout his life, is to increase revenue. As I explained, there’s only so much you can do with the portfolio without gambling and taking unnecessary risks and thus, he should look for new avenues of revenue. I suggested he consider a part-time job or even doing something like becoming an Uber driver. I explained to the client that unless he did something to increase his income, he would, in about a decade, run out of money, and I assured him that being in your early 80s without resources is not a good way of going.
The problem of overspending in retirement is not one that is new, and it’s one that I see frequently. People find that in today’s world when they retire, they generally have their health and want to take advantage of things they denied themselves when they were working. I cannot stress enough how important it is when someone determines they have enough resources to retire, that they factor into the equation what their lifestyle will be in retirement, and the importance of having a rising income the rest of their life. When you decide whether you can retire or not, you need to honestly look at what your lifestyle will be. Too many people don’t honestly look at what retirement will cost them, and thus, t run into problems down the road. It is important to be honest with yourself, particularly when it comes to expenses.
After our meeting and after weighing his options, the client agreed that since he wasn’t willing to reduce his spending he had to increase his revenue. His solution was to rent out a couple of rooms in his house using services such as Airbnb. The client explained what he was planning to do and wanted to know my thoughts. I looked at the client’s projections and I told him based upon what I saw, he would still need to look for ways to reduce spending. My reasoning was quite simple and that is when you make projections they should be realistic, not based on the best case scenario. If the best case scenario did occur the client would be in good shape. However, I think we can all agree that the best case scenario rarely happens. The bottom line is that when you’re dealing with something as important as your retirement, you have to use realistic numbers. Unrealistic projections can look great on paper; however, in reality they are meaningless.
The postscript of the story is that the client is going to rent out his house; however, his projections have been reduced dramatically and as a result, the client has agreed to reduce his spending.
I cannot stress enough how important it is when you’re in retirement to constantly monitor your expenditures. If you are overspending, the sooner you know about it the easier it will be to solve the problem.
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