Is $1 Million Enough? How Advisors Can Help Clients Set Better Retirement Goals

As economic storm clouds swirl with rising inflation and a potential recession looming, advisors are getting anxious questions from clients about their retirement dreams.

Raising the question, “Is $1 million enough for retirement?” can be the icebreaker to not only reassure their fears, but also create a new and better roadmap for retirement.

A recent study published by the Transamerica Center for Retirement Studies reported that most people believe they can retire comfortably on substantially less than $1 million. About half of millennials believe that $300,000 is sufficient. Meanwhile, baby boomers had more realistic expectations, estimating the need for retirement savings to be around $750,000. Yet the median savings among boomers is only about $200,000. All respondents surveyed in November 2020 reported similar challenges accumulating these sums, including the impact of the pandemic, where women and minorities were especially affected.

Long-held advice is that a client who has accumulated $1 million would be able to live comfortably for the remainder of their life. However, the median net worth of an American is just under $121,760, according to Federal Reserve data. This figure varies greatly by age, race and education level, and even the best savers are still woefully under the desired $1 million benchmark. A great chasm exists for many Americans to invest enough, especially during challenging economic times. This makes a conversation about inflation even more timely and invaluable for advisors to raise now. Here are a few ways advisors can broach the topic with clients and improve their retirement planning.

— How to help clients know where they stand.

— Budget busters that impact saving success.

— Bringing children into the conversation.

— Engaging expert advice.

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How to Help Clients Know Where They Stand

Inflation is a great motivator for clients to begin excelling at the basics. The first step for clients is to determine exactly how their monthly cash flow is utilized. Few people take the time to track their expenses. They presume they are doing well if money is left over at the end of the month and use credit cards to cover excess spending. As a result, they have no idea of their daily nickel-and-dime leakage, such as their regular Saturday donut splurge, which may be upending their goals. Understanding these numbers will help clients know exactly what they can safely spend each month.

As many financial advisors are focused on the investments themselves, this can be an opportunity to bring in a financial planning specialist. Clients appreciate teamwork, and hearing the importance of cash flow from two sources can often impact their success.

One way to do this is with cash flow modeling, which educates clients on the impact of inflation. Clients are shown a future where they are living on less, typically 70-80% of their working income. They can see the trade-offs in spending patterns when different categories increase or decrease. Adapting a more frugal budget for inflationary periods opens a good framework for reduced expenses in retirement. In comparing expenditures for basics like groceries and gas, a client can also readily appreciate additional ways to reduce unnecessary purchases or delay spending on items they can’t resist.

Budget Busters That Impact Saving Success

Debt. Longevity is important to include in budgeting conversations. Periods of inflation are much shorter than the typical retirement chapter in many people’s lives, especially as more people are living past age 100. Eliminating debt is one of the most effective tools in longevity planning. Inflation is again an advisor’s friend as it allows sometimes uncomfortable conversations about debt to flow more easily. As the Federal Reserve raises interest rates to combat inflation, a client can immediately see the impact in their credit card statement, and it can encourage them to pay down or pay off variable rate debt.

Housing. Inflation also underscores the value of choosing a low cost-of-living city for retirement. Housing prices in some cities have been rising at an eye-popping rate. While a senior may have already prudently paid off their mortgage, property taxes will rise with new home prices and can take a large chunk of income each year. Worse, property taxes do not fall as rapidly as home prices decline, impacting the budget for many years. An advisor can team up with a CPA to help advise clients on the most advantageous tax options for property, investments and Social Security benefits.

Health care. Choosing the right city can also impact the largest line item expenditure for seniors: health and elder care needs. Many people believe the best health care comes from established hospital systems in large cities. However, a rural physician who invests in understanding their patients’ medical needs can be as successful in keeping seniors healthy. Smaller cities can also offer social connections that are vital for senior health. Should an emergency medical situation arise, having access to the larger system is imperative, but may be resolved through an air medical service membership. In-home elder care services are more reasonably priced farther from large cities, but senior services like Meals on Wheels may be limited in smaller towns.

Caregiving. As Americans live longer, they will need assistance with their daily activities. Some clients may be relatively healthy, but still need assistance or oversight. Long-term care is often the expense that clients are the least prepared to handle. They may turn to family, but this can become a dual drain on both the senior’s budget as well as the caregiver’s earning and saving capability. Long-term care insurance can help buffer the costs of this kind of care, and an LTC insurance specialist can help tailor an affordable option.

Household essentials and services. The biggest surprise budget buster often comes from the most mundane needs, such as changing light bulbs and air-conditioning filters, buying groceries and getting the lawn mowed. Quality handyman and personal care services come at various prices and are important to scrutinize when every penny counts.

[See: 7 Ways to Prepare Your Clients for Recession]

Bringing Children into the Conversation

Adult children can make or break a parent’s retirement success. Parents are far less likely to have challenging conversations with their children, especially during economic hardships. However, inflation creates an opportunity to address these situations, and it can also help an advisor enhance their firm’s multigenerational growth.

Struggling children will understand that the advisor is seeking to ensure that both parties can thrive, while independent children may be brought into the conversation to fill in gaps, such as purchasing needed long-term care or life insurance for their parents.

Many adult children begin to take their own retirement more seriously when they are part of the planning process for their parents. Those who begin early often have greater success.

Engaging Expert Advice

The majority of respondents to Transamerica’s survey said their retirement planning is informal, and 40% admitted their plans were based on pure guesswork. This presents an opportunity for financial advisors to step in and help.

For a growing investment advisory firm, retirement and financial planning is an often underutilized revenue source and organic growth opportunity. Working in tandem with an established investment management advisor, next-gen advisors focused on financial planning bring early value to a client relationship with the firm. They are also able to nurture relationships with other financial professionals such as CPAs and tax attorneys, as well as life and long-term care insurance professionals to enhance referrals for the firm. Over time, they also provide continuity and can greatly enhance retention.

Inflation is a hot topic at the coffee bar. The fact is, $1 million will not go as far as it used to.

Addressing this gap with clients today will not only enhance their retirement success, but also help an astute advisor with their own transition success in the future.

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