As I write this article, I am having an outer body experience. I can swear I am in the midst of a Seinfeld episode. But alas, the smell of cigars coming from one side of my chair doesn't emanate from Kramer and the high-pitched cackling laughter from the other isn't Estelle Costanza, and I am not in a Seinfeld episode at all. I am poolside in a retirement community in southern Florida.
I tried to keep my profession under wraps, but within five minutes my aunt told anyone and everyone that I was a "wealth management expert."
You can imagine what happened–questions about the markets, their portfolios, and the economy started to come at me faster than a speeding bullet. The retirees' concerns can be summed up in one word: volatility. Specifically they want to know what should they be doing today to protect their portfolio?
My diplomatic skills were tested here–because I wasn't going to talk to them about stock tips, or what I see in my market crystal ball. What I was going to discuss with them was their spending policy. So I asked one simple and pointed question: What is your current spending policy? Believe it or not I did not get tomatoes thrown at me. Instead I got a bunch of confused looks. Finally, the man with the biggest (and smelliest) cigar of the group said, "Why is it your business?"
It is not only my business, but it should be the business of all advisors of current retirees. Why? Because a client's spending rate is one the most critical drivers of a successful retirement in difficult markets. JPMorgan's research suggests asset allocation alone may not prevent a significant decline in wealth. In fact, they found that a depleted initial investment followed by further withdrawals accelerated the decline. In an analysis that looked at 20-year time frames between 1926 and 2005, they found that the asset allocation mix actually had less impact on wealth preservation than the level of spending.
Are your clients too focused on performance and not enough on their spending? I would guess yes. According to a new survey SunLife, The Expense Reality, pre- and current retirees in their 50s thru 70s expect their expenses to go up, but they have no plan to cut back on leisure spending. Additionally, according to a report by Phoenix Affluent Marketing, 86% of millionaires surveyed expected their spending to remain the same or increase for the March-May 2008 time period. Furthermore, drug and medical expenses are said to be rising faster than inflation and a recent survey for the Employee Benefit Research Institute found that although 88% of prospective retirees expected to reduce their spending in retirement, only 45% actually did.
Know How Much You Spend
I found that most people determined their annual "spending policy" one of two ways–either they have a certain dollar amount in mind, or they spend a specific percentage of their portfolio each year (5% was the estimated average). Most people in this group used the specific dollar-spending plan, because to them it is very similar to getting a salary–something very familiar to them. Unfortunately, with this type of spending pattern one typically ends up overspending in bad years and underspending in good years.
When I probed further what I actually found is that most people, no matter how they say they determine their spending policy, were really unsure of the true amounts of spending. Many of the retirees in this group agreed that they were overspending without even knowing it. Therefore, in these questionable times it is imperative we as advisors get newer retirees to obsess about their spending with the same intensity as their portfolio performance.
