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3 Ways to Help Clients Avoid Underestimating Their Retirement Spending

Posted by Lori Fogle on Wed, Dec 02, 2020 @ 12:00 PM

“I’ve heard I’ll need less income in retirement, but is that true?”

A client asked one of our producers this question recently. And maybe you’ve gotten this one before too.

The answer many pre-retirees typically receive though, may be incorrect…


Pre-retirees have been told for years this rule of thumb that they’ll need about 70% of their current annual income to live off in retirement.

But many newly retired folks quickly find out they miscalculated. In fact, a financial professional we work with sees folks routinely underestimate their post retirement spending by 20-30%.

And according to the Employee Benefit Research Institute (EBRI) 2020 Retirement Confidence Survey - One in 10 said they were spending much more than they'd anticipated (Source).

In this post, we’ll get into what might be going wrong here. And more importantly, let you know of 3 things you can do to help clients prevent this from happening. And better estimate what they’ll need for the retirement lifestyle they want.

Let’s get to it…

1.       Ask a better question.

Instead of asking, Will I need more or less income in retirement? you can flip that and ask clients a better question:

Will your spending likely increase or decrease when you transition to retirement?

It’s a subtle difference.

And for many clients, their income WILL be less in retirement, but what they’ll SPEND in retirement may very well increase in order to maintain their desired lifestyle.

This includes where they’ll live, what they’ll wear, what kind of food they’ll eat, where they’ll go on vacation, what hobbies they’ll pursue and on and on.

Understanding a client’s desired lifestyle is paramount when planning for a smooth and successful transition into retirement and needs to be a focal point of discussions.

Here are some drill down questions:

  •  How much does it cost to maintain your current lifestyle (this a baseline figure to account for)?
  •  How much should we anticipate it will cost in the future when adjusted for inflation?
  •  Will you spend on anything additional in your retirement years that you’re not paying for currently like building your dream home or traveling the world?
  • Are your current retirement resources sufficient to support this spending?  

And try this: Ask clients what day of the week they spend the most money right now…

If they’re like most, they’ll say Saturday.

And guess what…

when they get to retirement, every day is Saturday!

OK so, why do calculations consistently fall short?

It seems to be a failure to acknowledge all expenses retirees will face in retirement. There are two significant expenses that financial professionals may see frequently overlooked and it likely makes up the bulk of the problem.

The reason these two expenses are often overlooked is a direct result of the way W2 employees are compensated and how payroll is handled today.

Here’s what you can do:

2.       Remind them of the two significant costs that often get overlooked.

Most workers in the United States are W2 employees. When you work as a W2 employee, your employer is responsible for payroll duties, meaning that they are taking out these two expenses automatically.

An employee designs their life around the net income they receive, easily forgetting what’s already been taken out of the equation.

So, what two line-items, that were previously deducted, will the client be responsible for in retirement?

Usually, both TAXES and HEALTH CARE have been subtracted from the employee’s gross pay. However, when a client begins to take income in retirement, in particular from pre-tax retirement savings, taxes and health care costs have not been deducted.

And taxes and health care costs can quickly increase a spending plan by 20 – 30%.

Let’s do a little experiment with a hypothetical married couple filing jointly.

They’ve determined that to maintain their current lifestyle, they’ll need $8,000 per month. That’s what they’ve become accustomed to spending over the last few years.

This is what they tell you, their financial professional, they’ll need to produce from their retirement resources.

Of course, they’ll have to adjust for inflation throughout retirement, but for now we’ll focus on the current need.

We’ll assume their combined household Social Security benefit is $4,000 per month. So, they’ll need an additional $4,000, or $48,000 per year, to complement Social Security and maintain their lifestyle.

Now, if they’re like many near-retirees, the overwhelming majority of their retirement savings is in pre-tax accounts. Because these are “I-O-U’s” to the IRS, they’ll pay taxes on all distributions.

If we estimate their taxes at 10% Federal and 5% State, they will need to take out $56,500 gross to pay those taxes to net $48,000.

Let’s add in health care expenses. Combined household Medicare premiums and supplemental insurance could easily add an additional $600-$800 per month to their spending plan. So, we’ll split the difference and say they’ll need $700 to cover that, or $8,400 a year.

So, where is this additional amount to cover health care costs coming from?

If they take it from their pre-tax account, we know they’ll pay taxes on it so the $8,400 just became $9,900.

All in all, you’ve just added about $20,000 to their spending plan. That’s about 20% more than they were expecting. And it’s 20% more than they thought about building into the income they’d need when they told you they needed $8,000 a month.

And we didn’t even get to the discussion on how much of their Social Security will be subject to taxes as a result of pre-tax account distributions. Their provisional income will be pushing $90,000 so this hypothetical married couple could expect to pay additional taxes on 85% of their Social Security benefits.

So, what does all this mean…

Or what's the 3rd thing you can do to help them better estimate what they’ll need in retirement?

3.       Create a spending strategy.

If you aren’t already, you might consider asking clients to complete a spending plan when they initially develop their written retirement strategy.

You’re not being difficult. It’s actually the opposite – you’re helping them be free to enjoy their retirement years with confidence. And it shows you care enough to get ALL the details.

Sure, we know things can change and things will never go according to plan… hello, 2020. But you can help them adjust more easily by avoiding HUGE oversights from the beginning.

Here are a few talking points:

  • Will their current retirement resources be enough to cover these costs in retirement? No?
  • What can they do to help reduce taxes or help pay for LTC needs?
  • Do they have a guaranteed1 lifetime income stream?
  • Have they thought about helping offset health care costs with a fixed indexed annuity? 
  • Do they know how they'll reduce debt prior to retirement?


If you’d like to discuss how to tackle these discussions with clients and have some possible solutions to offer… please don’t hesitate to reach out to the team at Partners Advantage.

That’s what we’re here for… to help you, help your clients better prepare for the retirement they desire – with products and solutions they may not be aware of.

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Tags: retirement strategies


This content is for informational and educational purposes only and is not designed, or intended, to be applicable to any person's individual circumstances. It should not be considered as investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action.

This blog post is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Partners Advantage Insurance Services, a Gallagher Company, its affiliated companies, and their representatives and employees do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.

It is not intended to render legal, accounting, Social Security or tax advice, and the services of those professionals should be sought. Social Security payout rates can and will change at the sole discretion of the Social security Administration.  For more information, please direct your clients to a local Social Security Administrative office, or visit www.ssa.gov

This program is not affiliated with or endorsed by any governmental agency.

1Guarantees and benefits are based on the claims-paying ability of the issuing insurance company. Broker/dealers, insurance agencies and their affiliates who sell the policy make no representations or guarantees regarding such ability.

A fixed indexed annuity can provide annuitization as a means to provide retirement income payments. An alternative option to annuitization could be the purchase of an optional lifetime income benefit rider.  Annuity riders are generally optional and available at an additional cost.  Riders are part of annuities and the base product should be suitable for the client before making any recommendation for the rider.

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