What sort of income will a client need in retirement? The traditional rule of thumb has been 70% to 80% of current expenses plus an inflation factor. But some brokers are digging deeper into those expenditures, not only to get a better idea of what a client will need, but also to create a stronger bond with their clients.
"Everyone spends their money differently and inflation has different effects on different expenses," says Steven Shagrin, a vice president of investments at Smith Barney in Youngstown, Ohio.
Among factors a more traditional approach may miss: increased travel and entertainment expenses during the early years of retirement, a surge in spending during the transitional year from working life, the desire by many people to help their grandchildren financially, and increased medical costs in later years.
"This is where we really bring value," said Alexandra Armstrong, a CFP at Armstrong Welch & MacIntyre, a branch of Financial Service Corp., in Washington, D.C. Armstrong requires all her clients to fill out detailed expense sheets and provide her with their best estimates for future spending needs.
"I have found the 80% rule does not work at all," she says, "especially during the first year."
Many clients, for example, end up buying and selling homes or apartments during the transitional year and spend money on moving, renovating and refurnishing. And they will often buy a new car "to symbolize their new freedom," Armstrong says.
When people ask how to invest their IRA rollovers, Armstrong first asks to see their expenses. Then, she recommends an investment portfolio designed to meet those spending needs.
Cynthia Meyers, a CFP and registered principal at Foothill Securities in Sacramento, Calif., also pays close attention to costs associated with changes in her clients' lifestyles. Some people want to work in a related field, which may require more education, or start their own small business, which will require capital.
"I have found in my work over the years that [the 80%] rule is not always the case. People's priorities change," she says. As a result, she normally figures spending needs at 100% of current levels, plus inflation.
That's what Todd Eberhard, president of Eberhard Investment Associates in New York City, also has found. People travel much more, they join clubs to recreate the socialization they had at work, and they often will volunteer at and contribute to charitable organizations. In fact, when his clients think about moving to sunnier climes, he figures in these costs of making new friends.
The broadbrush approach also fails to distinguish between the degrees to which inflation affects different parts of the economy, says Shagrin. Food and energy costs are susceptible to surges and dips, while taxes on real property may be rising a bare 1% to 1.5% a year, he notes. A standard inflation formula also fails to take into account the control clients have over how much they spend on items such as clothing and vacations depending on how flush they feel.
Getting into spending details requires constant monitoring and adjustment, not only to take care of unforeseen events but to make sure projections remain on track. More work, yes, but also a tighter relationship between adviser and client.
"It's like an annual visit to the doctor," says Armstrong. "They feel they need to stay in the loop, and they need to stay with you."