Clients should address potential big spending items while they still have employment income.SeizaVisuals/iStockPhoto / Getty Images
Newly retired clients are often fearful of surprise expenses such as a leaky roof or a car repair bill while on a fixed income.
Barbara Knoblach, certified financial planner (CFP) at Money Coaches Canada in Edmonton, says clients need to anticipate the unexpected before retiring.
“Most of these expenses are foreseeable with proper planning,” she says.
Specifically, she asks her retired clients about the condition of their homes and vehicles, whether appliances might need replacing, and other possible repairs.
Depending on their answers, Ms. Knoblach will incorporate those anticipated costs into the client’s cash flow plan.
In practice, that means separating regular, ongoing living expenses from larger, infrequent capital expenses, she says.
“We account for both [those types of expenses] when determining the client’s spending level, which helps prevent overspending on day-to-day expenses at the expense of future larger needs,” she says.
In an ideal world, clients would address these costs while they still have employment income, she says.
“It can be easier than drawing additional funds from retirement assets later,” she notes.
That’s one reason Ms. Knoblach encourages clients approaching retirement to “test-live” their retirement income while still employed. The idea is to see whether they can live comfortably on the level of spending their retirement plan projects, she says.
“If the answer is no, it may be a sign to delay retirement and continue building their nest egg,” she adds.
Maria Smith, a qualified associate financial planner at Handful of Thoughts Financial Planning in Edmonton, is currently planning for such expenses as her husband is retiring next year.
As their household income will decrease, they made a list of items to purchase while they still had higher disposable income, she says.
“We determined the costs and then prioritized them,” she says.
The top of their list? Replacing two aging vehicles, and new guitar equipment for her husband, who plans to spend more time playing music.
Omari Whyte, CFP at IPC Securities Corp. in Toronto, says he introduces his “get ready for retirement” package to clients five years before their planned retirement day.
He emphasizes health – specifically, booking any medical procedures while still working and having access to full employee benefits.
He says major dental surgery and orthotics are examples of things his clients have prioritized before retiring.
“Not everything is 100 per cent covered under the employer plan or the provincial health plan, so it’s good for them to take care of known health procedures while they’re still working,” Mr. Whyte says.
Cody Weber, owner and CFP at Basic Financial Services in St. Catharines, Ont., says his planning process includes bringing forward key expenses before retirement.
Some are needs-based, such as a vehicle replacement. Wants may include home renovations. He says kitchen renos tend to come up frequently, as clients plan to cook and entertain more during retirement. He notes that the importance of ensuring cash flow is available and/or an emergency fund is set up ahead of time for these large expenses.
He specifically asks about things that would add stress in early retirement and seeks to understand how they plan their time.
The problem with financial surprises is that, without a plan, clients may be forced to withdraw from their assets during market downturns, he says. And there can be income tax implications they weren’t anticipating.
Mr. Weber advises clients to set up a home equity line of credit before retiring, while they still have an income and can qualify for it. He says it can be a decent last resort in place of a well-funded emergency account.
He says if they have access to credit, they can pay it off with cash flow over time instead of pulling a large amount from investments.
“There’s nothing worse than not having it readily available,” he says.
Mr. Weber notes that many retirees struggle with spending after saving for so many years; having a plan to take care of financial surprises can help them with the transition.
“A plan provides them with comfort and peace of mind.”