Sign up for the new Globe Advisor weekly newsletter for professional financial advisors on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
Some seniors are too frugal in retirement, curbing spending on goods and services they can afford that would make their lives easier and more enjoyable.
The so-called “retirement consumption gap” often stems from an inability to switch off a saving mindset and fears of running out of money, especially as the cost of living rises and people live longer.
A 2021 U.S. report showed the number of households that can fund their retirement increases dramatically to 48 per cent from 18 per cent during the first decade of retirement, driven by reduced spending. Still, almost a quarter of Canadian retirees described their lifestyle as frugal, according to a 2019 Sun Life Financial Inc. survey.
Some advisors say it’s their job to help clients with a solid financial plan feel good about their frugality without shortchanging their retirement.
“Frugality is a character trait,” says Rona Birenbaum, certified financial planner (CFP) and founder of Toronto-based Caring for Clients. “People who were always frugal can’t just turn off the switch.”
She notes some well-off clients check in with her before making a major purchase such as buying a new car or renovating their bathroom.
“They’re not looking for approval, but confirmation. They’re being responsible,” Ms. Birenbaum says.
Advisors can also work with clients to ensure they’re not making “irrational saving decisions,” she adds, such as cancelling a long-awaited trip to visit grandchildren that would make their lives more fulfilling.
If clients need to cut back on spending because their financial circumstances have changed, Ms. Birenbaum tries to help them find places to trim that won’t sacrifice their retirement lifestyle. An example could be gifting a little less money to adult children or grandchildren or leaving less to beneficiaries in an estate.
“If that’s okay with them, then the problem is solved,” she says.
Advisors need to empathize with clients who fear running out of money in retirement, even if their financial plans are on track, says Zainab Williams, CFP at Elleverity Wealth Management in Caledon, Ont.
“It’s a delicate time because there might be different circumstances they’re grappling with, and they’re just trying to figure out if they’re going to be okay,” she says.
For example, Ms. Williams says retirees might have parents in long-term care or have friends who recently passed away, which affects them emotionally and may have them thinking more about their long-term financial position.
How to make retirees feel in control
For retirees worried about their finances, especially amid rising inflation and market volatility, Ms. Williams tries to bring the conversation back to what they saved for, such as travelling, pursuing hobbies, or gifting money to children or charities. She then shows them how those goals are aligned with their financial plan and long-term investment objectives.
“Once they start to think about it from that perspective, they realize that they actually are in control of their retirement journey,” she says.
She also likes to consider different scenarios with clients to help them be more at ease.
“For example, if a portfolio has reduced returns, how will the goals being funded be impacted?” she says.
Ms. Williams also suggests having regular conversations with clients every six months or so, depending on the circumstances to allay any fears that may arise.
“Sometimes people suffer in silence, especially if they feel overwhelmed,” she says, including people with more affluence.
“They may feel that, because they have so much wealth, they don’t have a right to worry. There’s a sense of guilt that prevents them from reaching out for help, so it’s important to maintain that open communication.”
Encouraging them to spend
Evan Turner, wealth advisor at Nicola Wealth Management Ltd. in Kelowna, B.C., has worked with many retirees who, despite having millions invested across a diversified portfolio, still worry about running out of money.
“It’s often well-rooted in their upbringing or based on how they built that wealth and how they spent money throughout their life,” he says.
Mr. Turner says advisors can help the frugally minded feel better about spending by helping them find ways to put it to good use – either by donating it to charity or using it for life experiences such as travelling to visit family and friends.
He points to an example of a client looking to find cheap flights to visit their grandkids in another country. Instead of taking several flights to save money, he encouraged them to splurge on a direct, business-class flight, which they could afford and meant they would arrive sooner and well-rested.
“It’s about showing clients the real-world impact of spending that money,” he says, noting that the client plans to take their grandkids on a trip to Europe.
“As advisors, we want to empower their spending by giving them a path they can take to live a very fulfilling life.”
For more from Globe Advisor, visit our homepage.