How to have hard talks with overspending clients

Retirement can feel like a permanent vacation. And what do most people do on a vacation? Splurge a little.

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But left unchecked,  these extravagances — cars, boats, vacation homes and even just more dinners out on the town — can strain portfolios. Advisors say proactive check-ins and other strategies can help keep clients’ spending from drifting.

Recognize the ‘why’ behind overspending

Understanding the motivation behind spending is the first step. About 70% of consumer purchasing decisions are driven by emotional factors, according to a Gallup survey. Retirees are no exception. 

Jorie Johnson, founder of Financial Futures, an RIA in Brielle, New Jersey, said retirees reason through their spending, such as when they want to help out children or grandchildren with gifts.

“Some of this stems from [clients] not being able to have the hard conversations with family about how much money they actually have,” Johnson said. “They’re not sure how to start the conversation. That’s where we step in.”

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She recommends check-ins, involving beneficiaries when appropriate and, if needed, referring clients to financial therapists for a reset.

Illustrate the spending trade-offs

Advisors can also help model trade-offs, an approach that can be less intimidating than directly telling a client they are overspending, said Luke Lloyd, CEO of Lloyd Financial Group, an RIA in Union, Kentucky.

Using simulations, advisors can illustrate how spending decisions affect portfolio outcomes. Lloyd said modeling can show the likelihood of funds running out under different scenarios. Even for high net worth clients, comparing a $200,000 purchase with a $500,000 purchase can be instructive.

“Usually, the conversation is more fun. It’s ‘Hey, here’s how much bandwidth you have. Here’s how much you can afford to buy a second home. Here’s how much boat you can afford to buy,'” Lloyd said.

What questions lead to client breakthroughs?

Even apps like Rocket Money or other tools to gather up a client’s entire financial picture can help them see where they can and should be able to spend on health, food and other basics. 

He encourages spending on travel and fun early, while using more conservative drawdowns, even less than the average 4% withdrawal rate.

Encourage small changes for big impact

Making small adjustments after a spending review can also be effective. Johnson cited a client who wanted to continue dining out several times a week in retirement for social reasons. After reviewing expenses, the client chose to cut back on cocktails, a way to cut costs while staying social.

The ability to see and save ahead of rising costs is crucial, as more than one-third of retirees faced unexpected costs since retiring, but only 59% have at least three months of funds saved for emergencies, according to a Mutual of Omaha survey taken last fall.

Closely manage retirement income streams

Alongside spending oversight, building a structured retirement income plan can support better decision-making. Advisors can help clients manage required minimum distributions, including delaying withdrawals until age 75 for some under current rules, while maintaining adequate liquidity for spending needs.

Tax strategies, including Roth IRA conversions, can add flexibility. Converting funds allows retirees to pay taxes upfront and potentially delay withdrawals later, Lloyd noted.

A drawdown strategy is another best practice, too. When markets are better, retirees can save for when they are not, or can spend on a splurge item or other fun purchases like travel.

Recognize when a client needs outside professional help

Advisors can pair clients with others, like therapists, to help clients review the way they were raised to think about spending, or internal money scripts, said Elana Feinsmith, a certified financial therapist and CFP with Oak Financial Coaching.

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If a client has seen someone pass away, received a diagnosis of ill health or simply has never had a large sum of cash, they might have deeper psychological reasons behind their overspending.

Such sessions take a few hours to help clients, but once they do so, they can work well.

“It’s a lot more like physical therapy or training,” Feinsmith said. “If you go in for one or two sessions of physical therapy or to the gym with a trainer, yeah, you’ll get somewhere. But it takes more time to really build the financial muscle.”