Even the affluent have retirement jitters
Despite healthy incomes, many spend too much and save too little
When a wealthy and newly widowed client came to adviser E. Alan Galinsky for guidance, she turned out to be in bigger financial trouble than she thought.
“She lived in an upscale community in Boca Raton, [Fla.],” said Mr. Galinsky, an adviser with Arch Financial Group, which manages $226 million in assets. “Her husband handled all of their finances, so when he passed away, she thought she was OK.”
In fact, the widow was close to decimating her investment portfolio, partly due to her opulent lifestyle. Mr. Galinsky pushed her to cut some costs, but ran into resistance. “She drove the top-model Lexus and needed to downsize to an Accord,” he said. “She said, “If my friends see me in an Accord, they’ll never talk to me again.’”
COMING UP SHORT
Advisers are finding that while their affluent clients are far from being unable to retire, some are short of the wealth they will need to support their lavish pre-retirement lifestyles. Much of the shortfall can be attributed to the clients’ inability to save or to rein in their spending as they accumulate their nest eggs.
“Some clients were coming into the practice five years ahead of their retirement date with income in the mid-six figures but with total savings of less than that,” said Paul Palazzo, a managing director at Altfest Personal Wealth Management. “If they retire at 65, they’ll be broke at 67.”
A broad swath of the wealthy feels a lot less comfortable than they would like.
About half of the 1,511 mass-affluent investors with $100,000 to $1 million in investible assets polled by Spectrem Group said the recession has forced them to delay their retirement. A similar percentage said they were confident they will have enough money to live in a manner they like during retirement, a much smaller number than the 75% of millionaires who feel the same way and 90% of ultrahigh-net-worth clients who agree.
Spectrem polled 997 individuals in the “millionaire” category, with a net worth of $1 million, and 507 ultrahigh-net-worth people with $5 million or more.
Among the mass affluent, 76% said they are concerned about having enough saved for retirement, compared with 62% of the millionaires and 50% of the ultrawealthy, according to Spectrem.
Interestingly, among the wealthiest poll participants, the biggest worries center on macroeconomic events such as the national debt and the political environment.
“The prolonged downturn is an inconvenience for them,” said Tom Wynn, director of affluent research at Spectrem. “They might have to work a little longer or reduce their lifestyle, but it’s not going to be a showstopper.”
Part of what contributes to clients’ spendthrift ways is the misguided belief that they’ll be able to work forever and continue to make the money they need to support their lifestyle, advisers said.
For some of the high-earning clients at Mr. Palazzo’s firm, the monetary choice sometimes comes down to socking money away in retirement accounts or paying for private schools from pre-K through college. In New York City, where Altfest is based, tuition at top private elementary and high schools can rival the tab at an Ivy.
“It’s done with the best intentions, but these expenses can pile up,” Mr. Palazzo said. “We tell them that we understand their goals, but they need to support themselves beyond age 80 or 85. They listen to varying degrees, and in some cases, they can make adjustments.”
Melissa Hammel, managing partner at Hammel Financial Advisory Group LLC, which manages $107 million, says she often finds herself in the role of therapist when discussing spending limits with clients.
“In my experience with those issues, there’s always something greater fueling the compulsive spending,” said Ms. Hammel, who has had to intervene with a handful of clients who were raiding their retirement accounts to go on buying sprees.
BURNING DESIRE
In one case, a couple burned through a $1 million individual retirement account despite Ms. Hammel’s repeated warnings and expressions of concern in written letters. She ultimately let the clients go.
In some cases, however, if the intervention is done right, a client can be saved.
“We had one client who was using his retirement money to help out family members,” Ms. Hammel said. Her staff met with the big spender and showed him hard figures of just how long it would take for his retirement account to hit zero if he continued to make withdrawals. “Sure enough, he stopped,” she said.
If interventions are done appropriately, Ms. Hammel said, an adviser can connect with a spendthrift client while they still have a nest egg.
“But success depends on whether they’re receptive,” she said.
E-mail Darla Mercado at [email protected].
“If they retire at 65, they’ll be broke at 67.”
Paul Palazzo
Managing director
Altfest Personal Wealth Management
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