A couple walks into my office. The husband is a large business owner, and the wife is a doctor.
This sounds like the beginning of a financial planner-style bar joke.
They are in their late forties and want to retire at age fifty. We launch into their plans and financial situation. They have four million dollars in various investment accounts, income from the business, a large vacation home, and all the trappings of a high-income lifestyle. They love fine dining, cruises, and international travel.
A second couple walks into my office the same week. The wife is an elementary school teacher, and the husband is a cook. They are in their mid-sixties, want to retire next year, and lead a modest lifestyle. They have 350,000 dollars in the state retirement system, a small pension, a two-bedroom condo, and enjoy gardening and hiking.
Both couples ask me the same question: “How am I doing compared to the average client you see?”
We hear this question all the time. People want to know how they stack up compared to everyone else. It is a question rooted in pride, nervousness, and uncertainty.
Let us look behind the curtain. Upon digging into the details, the first couple reveals a considerable amount of debt coupled with high rates of spending. The second couple has three payments left on their mortgage, no other debt, and happily spends less than $3,000 each month. Couple 1, if they continue on their current track, is going to run out of money. They could easily have thirty or forty years of retirement ahead of them. Couple 2, if they continue on their current track, is going to have enough money to continue their current lifestyle throughout retirement, even when we account for inflation and end of life healthcare needs.
Ironic, isn’t it? Society would probably consider Couple 1 more financially successful from an outside perspective than Couple 2, but success is in the eyes of those who don’t run out of money. It does not matter how much money you make now; Future You has to eat too. Of course, Couple 1 has all the tools they need to right the financial ship.
People may not know how much money they spend each month, but most have a general idea. Of those people, however, far fewer know how much they want to spend in retirement. As a financial planner, I do not expect people to have those answers. Generally speaking, we do not want a precise answer; it does not pay to be exact with some of our estimates. We can create a retirement spending plan that is down to the dollar, but an unforeseen expense can blow up an otherwise well-crafted plan. Instead, it is usually better to establish a ball-park idea of spending, round up, and reevaluate once people have actually spent a few years in retirement.
After all, retirement spending is almost never consistent. Big spends are common right after retirement. That might be who is to partially blame for the current rental car shortage in hot vacation spots--retirees determined to finally travel after COVID temporarily derailed their dream vacation plans!
Big spending does tend to taper off in retirement, with exceptional years here and there. Later in life there are also bigger spending years, but they tend to veer more towards health and convenience. These are some of the “hidden” costs of retirement. Clients mention goals around travel, starting a business, charitable work, and philanthropy, or leaving a legacy to the people and causes they care about. They may even have an idea of how much to budget for these meaningful goals. It is far more rare, however, for someone to have a goal to budget out money for healthcare later in life.
Honestly, it is not a fun goal to plan--you will not find it on anyone’s bucket list. Although healthcare is one of the most expensive parts of someone’s retirement, it is almost never a specific, outlined goal unless clients witnessed it firsthand with a family member.
Yet if we look at spending across someone’s lifetime, we almost always see a spike in the last couple years of life.
We never shake a finger at a client and tell them they have been doing things wrong. At the same time, clients do not hire us to sugarcoat a situation either. When we run an analysis and create recommendations, the focus is always centered on what can be done to improve the situation, and how we can change unwanted trajectories while there is still time. The last thing we want is for clients to lament as the opening lines of Charles Dickens’ A Tale of Two Cities: “It was the best of times, it was the worst of times.”