Helping Clients Rein in Excess Spending

Jul 30, 2019 Share This 


Admit it: you likely had someone in mind when you read the title of this article. Perhaps it’s the client who simply “must” have a new car every year, the one who insists on a second home in Florida that sits empty for months at a time, or the investor who decides to make the dream of worldwide travel a reality despite lacking the means.

Meanwhile, their retirement savings dwindle with each transaction. Your clients certainly have the right to enjoy their savings when they retire, but it’s important for them to understand any implications that going overboard can have on their future income.

How can you know when a client’s spending habits threaten his or her financial security, and what can you do about it?

Warning Signs of Overspending

Whether still in the workforce or already withdrawing from retirement funds, there are clues to look for if you suspect some clients are living beyond their means.

For those nearing retirement, a common sign of overspending is when someone lives from paycheck-to-paycheck. Unfortunately, this problem is all too common in American households. One study showed that 78% of U.S. workers live paycheck-to-paycheck to make ends meet. The same study revealed 18% of workers reduced their 401(k) contributions and/or personal savings and 38% don’t participate in a 401(k) plan, IRA or comparable retirement plan at all.1 Additionally, if a pre-retiree has more than enough income to cover housing, food, transportation and other basic needs yet still has significant debt, they likely spend too much on non-essential items.

Retirees who repeatedly request large-sum withdrawals each year in addition to their basic plan likely have a spending problem as well. It can help advisors and clients alike to know what the average retiree spends on various categories to determine a baseline for discussion. According to the latest Bureau of Labor Statistics data, these are the average monthly spends for retirees over age 65:2

  • $1,322 on housing
  • $567 on transportation
  • $499 on healthcare
  • $483 on food
  • $237 on personal insurance/pensions
  • $202 on cash contributions and donations
  • $197 on entertainment 

If, when speaking with clients, you discover any of these categories is out of line, it’s time to dig deeper.

Tips for Addressing Overspending

Invite Transparency

Assuring clients that you have their best interests at heart is a key to building trust. Sometimes all a client needs is the simple invitation to freely ask questions and talk through big-purchase decisions. Let them know that you welcome their emails and phone calls to talk through how potential large purchases that aren’t included in their budgets may impact future returns. It’s important, however, to not come across as a killjoy or suggest that your recommendation will always be “no.”  

Instead, add value by helping clients consider how much they can spend without negatively impacting their financial wellbeing, and which accounts to withdraw from, including any potential tax implications. Many clients value the advice they receive and simply need to know the door is always open. It may make them think twice before making that next big purchase, or at least consider reaching out to you first for advice.

Discuss Alternatives

When your client has a lifelong dream of an extended cruise around the world yet their budget suggests a more appropriate option is an extended weekend in the northwoods, it can lead to a difficult conversation. 

In these instances, recommend alternatives that better align with their overall goals. Coach your clients by sharing how you’ve seen other investors make wise purchasing decisions and the benefits they’ve enjoyed as a result, both in the short term and in the long term. 

Perhaps that dream vacation or other major purchase can happen, but now just isn’t the right time. Talk about what it will take to eventually get there and strategize with your client to help make it a reality when the time is right and when their financial status aligns with their personal goals.

Share Comparative Income Forecasts

It’s helpful to demonstrate in black and white what someone’s income could be with investing some of that extra spending in retirement funds. It’s just as helpful to show the negative implications of diverting those investments elsewhere. If there have been several large withdrawals taken in the last year or two, chart out a model showing the trajectory of future returns and the likely inability to sustain similar spending moving forward. This kind of reality check can be very eye-opening.

Spending too much in early retirement when assets still have time to grow is especially concerning. It’s difficult to forecast how much money those diverted funds might have earned over the next 20–30 years and, with increasing longevity risks, the task becomes even more difficult. Since the World Economic Forum already predicts that the average 65-year-old doesn’t have enough savings to cover just 9.7 years of retirement income, the added risk of overspending should cause even greater concern.3

Document Everything

In a time of heightened scrutiny over compliance, advisors need to consider whether they may be held liable if clients outlive their savings. Failing to properly advise clients about the potential consequences of their overspending and how it may impact their budgets may not comply with fiduciary responsibilities.4 Acting in the best interests of your clients sometimes means telling them things they may not want to hear. 

It’s important to also document those conversations regarding any warnings and any budget recommendations. Keep records of written correspondence and document everything in a customer relationship management (CRM) system.

Consider Discussing Underlying Issues

Advisors know that, at times, it seems they’re as much a personal counselor as they are a financial counselor. When a client repeatedly makes poor financial decisions despite the warnings, it may be an indication of deeper underlying issues. 

It’s not uncommon for new retirees to feel a sense of loss over a fulfilling lifetime career. Retirees also may feel boredom with all their newly found free time or even loneliness from lack of social interactions, divorce or the loss of a loved one. Help them see how the temporary satisfaction offered through overspending may only compound their negative feelings in the long run. Sudden spending in older retirees or falling victim to scams could even be an early warning sign of an underlying medical condition such as dementia.5

Show you care by expressing concern, and be prepared to sensitively provide recommendations for help they may need that falls outside your level of expertise. As you seek to help your clients build their portfolios, also seek to understand their unique situations through a holistic approach and take their emotional wellbeing into consideration. 

To gain a deeper understanding of an advisor’s role in dealing with investor emotions, access our complimentary guidebook, Defusing Emotions: An Advisor’s Role in Disciplined Long-Term Investing. Simply click the link below.

Defusing Emotions: An Advisor’s Role In Disciplined Long-Term Investing


1CareerBuilder, Living Paycheck to Paycheck is a Way of Life for Majority of U.S. Workers, According to New CareerBuilder Survey, Aug. 24, 2017

2Nerdwallet, Let’s Get Real: What an Average Retirement Costs, May 29, 2018

3Bloomberg, Retirees Might Run Out of Money 10 Years Before They Die, June 12, 2019

4Smartasset, What Is a Fiduciary?, Apr 23, 2019

5National Institute on Aging, NIH, Managing Money Problems in Alzheimer's Disease, undated


Topics: Client Relationships