Do your clients want a roof over their heads when they retire?
Of course, the answer to that question is most likely a resounding “yes”—which is why advisors should bring this up during serious retirement planning discussions with their pre-retiree clients and prospects. The following valuable insights can help ensure housing, food, and other basic expenses do not create a proverbial money pit for your clients’ savings during retirement.
Start With The Cost Of Housing
Assistedliving.org states that a retiree residing in an independent community can spend from $1,500 to $4,000 monthly for housing, based on their location. Let us take the lower end of $1,500 per month and presume a 2% inflation rate for housing expenses such as property taxes or rent, and utilities.
These are the hypothetical totals your clients will draw from their assets upon retirement to cover eating, housing, and utilities:
And these are the hypothetical totals for both spouses:
Let us look at a hypothetical retiree who has an annual income of $75,000 and will only spend $7.74 per meal, adjusted for food inflation, and $1,500 per month for housing and utilities, with a 2% inflation rate. These two expenses alone will amount to a total of $1,367,789 in 25 years of retirement.
Add in the cost of vacations, emergencies, recreation, gifts, and medical expenses over this period, and you can see how quickly assets can vanish in their deaccumulation phase.
Continue With Food—How Much Of Your Clients’ Assets Will They Eat?
According to the U.S. Department of Agriculture, in 2022, Americans spent 11.3% of their annual income on food expenses. To put this into perspective, if your clients ate like the average American, it would mean restricting their meal spending to the following amounts:
If we assume a client or prospect will retire with $75,000 of retirement income, per the example in the previous section, the U.S. Department of Agriculture numbers suggest that they must stick to a budget of $7.74 per meal, which must be adjusted annually for food inflation for each day for their entire retirement.
According to surveys such as the one conducted by the Employee Benefit Research Institute in 2023, 64% of Americans feel confident they know how much they should withdraw from their retirement savings and investments during retirement. But when it comes to managing $7.47 per meal, what percentage of people do you believe can successfully do this?
And additional daily expenses such as between-meal snacks like an iced lemon loaf, coffee, and alcoholic drinks must be considered when estimating and calculating a client’s meal budget in retirement.
For instance, if your client’s annual retirement income is $75,000, and they typically spend $3 on Starbucks, $2 on an iced lemon loaf, and $8 on a glass of wine each day, totaling an extra $13 daily, this amount must be accommodated within their meal budget of $7.74 per meal.
Simply put, they are left with $3.41 per meal after accounting for these additional expenses. This means that breakfast, lunch, and dinner must fit this $3.41 budget. As a result, dinner options like the early bird special at Sizzler or Golden Coral for $11.99 are no longer feasible within their budget constraints.
To further understand the impact of food on retirement assets, we assume food inflation as measured by the Food and Drug Administration for the next 25 years is the same year by year as it was for the past 25 years through 2022. At this inflation rate, do you realize that your retired client with $75,000 of income will eat $296,717 of their assets over those 25 years? And if they plan to feed their spouse, that will mean $593,434 towards food!
Here are how the anticipated numbers add up.
And if they include their spouse, the assets they will eat in retirement will naturally double.
With disciplined budgeting and prudent guidance from their financial advisors, retirees can ensure that every dollar they have saved for retirement is allocated wisely, allowing them to truly savor their golden years. This is a key area where advisors can demonstrate value for clients, and with the right investment and practice tools at their disposal, they can optimize their ability to prevent clients from sinking their retirement savings into a metaphoric money pit.
Salvatore M. Capizzi, CEPA, is executive vice president of Dunham & Associates Investment Counsel Inc.