Let’s jump ahead 35 years when the three couples are all 65 and ready to retire. It’s at that point that all three families finally hear about and decide to consult with a financial advisor who does comprehensive financial planning. The financial planner does an analysis for each family, explains to them their current situation and provides specific and customized recommendations.
Recommendations to Implement at Retirement
Steve and Sarah Spellman have become accustomed to such a high cost of living that retiring at this point is not feasible unless they are willing to make some major lifestyle changes, including downsizing their home. In fact, if they retire and continue down their current path without any changes in spending or downsizing their home, they are likely to run out of money sometime between age 70 and age 84, depending on how the market performs.
They are both in excellent health, and their doctors think it’s likely they’ll live into the early 90s or longer, so this puts them in a precarious situation. The Spellmans had really hoped to leave their two kids, who are now adults with children of their own, a sizable inheritance that now seems implausible. They fear that, instead of leaving their kids money, they’ll have to be reliant on their children to help them out financially at some point.
Fortunately, the Spellman’s new financial advisor has some great options for them to change their financial trajectory. However, had the Spellmans consulted with her when they were still in their 30s, the lifestyle changes they’d need to make to have a positive outcome would have been far less drastic.
After going through the various options, Steve and Sarah agree to a combination of changes they feel will work for them:
- Sell original home: They decide to sell their $1,200,000 house (which 35 years later is, of course, worth a lot of money in nominal dollars because the home value has kept up in line with inflation. But for this story, we will convey all values in 2024 dollars). The Spellmans downsize to a $300,000 house, which they’ll pay for in cash. Since they have been empty nesters for some years now, they feel ready to downsize and plan to move into a single-story home that will allow them to age in place for years to come.
- Cut spending: Their annual spending has blown up to $190,000 (again, in 2024 dollars), despite their mortgage having been paid off for a few years now. They need to cut their spending down to $72,000 per year, a pretty substantial cut! Fortunately, with the smaller home they plan to buy, property taxes and overall home maintenance will be much more affordable, so they won’t have to cut their non-house-related expenses quite as drastically.
- Work longer: They agree to each work three more years and retire at age 68 instead of 65.
- Part-time employment: Finally, Steve decides to work part time in retirement for the first five years, earning $75,000 per year, half his current pay. He really enjoys his job and finds it gives him purpose in life. But he’s at a point where he’ll be more than ready to have a little more flexibility in his schedule when he partially retires in two years. Thankfully, his company is more than happy to keep him on part-time; his knowledge and experience is a huge asset to the company. Steve is also relieved that having this income during the first few years of retirement will enable him and Sarah to not have to cut their spending quite as drastically as they would have had they chosen to both retire at 65.
The financial planner is thrilled that the Spellmans accepted the situation they are in and committed to changing course, choosing the path that they feel works best for them. She recommends they continue their relationship, meeting at least once a year to make sure they stay on track with their spending. As the relationship continues, they can adjust the plan as needed if anything changes with the Spellmans’ situation.
Realizing their own missteps in lack of planning, the Spellmans recommend that their adult children begin working with the planner so that modest changes to their lifestyles and finances can have a bigger impact on their futures.
Alternative Scenarios: Implementing Recommendations in the Present
It can be challenging to make such rapid, sweeping changes in lifestyle and finances as the Spellmans would need to implement if they began working with a financial advisor on the brink of retirement.
So what would happen if they went down this road a lot sooner? Of the families in our fictional scenario, the Spellmans would have gained the most if they had begun working with a financial advisor—one who does comprehensive financial planning—at age 30.
Remember, all three families were fortunate to have been working with an excellent investment manager who set them up with highly diversified, low-cost portfolios in line with their respective risk tolerances (which “coincidentally” were all identical!). Their investment manager calmed them during market downturns so none of the families got anxious and pulled their money out of the market, which could have been devastating to the trajectories of the growth of their wealth. She also warned them of the risks of investing in single stocks, cryptocurrency, and other types of high-risk or high-cost investments that the three families all inquired about with her over the years. By providing this information, she kept them on the right investment path for compounding the growth of their investment portfolios.
Had the Spellmans met with a financial advisor who does comprehensive financial planning (not to mention at the same overall cost as their actual investment manager!), here’s how they could have benefitted:
Changes for the Spellmans at Age 30
With a comprehensive financial plan, the Spellmans could’ve had a large headstart on making some of the drastic changes they needed at 65. The planner could’ve shown them the trajectory they were on and cautioned them about their spending.
In fact, a few small changes at age 30 could’ve resulted in a drastically different result 35 years later. With the following advice and changes made, the Spellmans would be able to retire at 65 and not even need to downsize their house if they didn’t want to:
- Increase their 401k contributions from 5% to 10%, getting them to an overall contribution rate of 15% when you include their employer’s matching contribution.
- Rather than spending all of their take-home pay each month, keep their spending (outside of mortgage and real estate taxes) at $108,000 per year, increasing with inflation, rather than letting their lifestyle continue to expand.
It’s easy to fall into the trap of lifestyle creep, continuing to spend more as you make more. And when you’ve done this for a large portion of your life, it can be challenging to make sudden, drastic changes to your lifestyle like the Spellmans would have to do at age 65. Setting up incremental barriers—like putting aside a certain percentage of each raise as an additional retirement contribution—can help prevent the creep of your lifestyle.
Along with the two changes above, by continuing to work with the financial planner, and checking in at least annually, the Spellmans can stay on track and ensure they are always taking advantage of the latest tax benefits and planning strategies.
Again, since this financial planner is also an investment manager and costs the same as their current investment manager, the Spellmans get this incredible benefit at no additional cost!
Wrapping Up Part II
Because they were saving and investing the least of any of our three families, it’s no surprise that the Spellmans stand to gain the most from a headstart on a comprehensive financial plan and working with a financial advisor who does both financial planning and investment management.
But that doesn’t mean the other two families, the Bennetts and Franklins, wouldn’t gain anything by working with a financial advisor earlier. In Parts III and IV, we’ll take a closer look at how each of the families would be positioned at age 65 and the alternative route starting at age 30.
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Stay tuned for Part III of A Tale of 3 Families, available next Friday, Dec. 27.
About the author
Carla Adams is aCERTIFIED FINANCIAL PLANNER™ practitioner who specializes in helping women build strong financial plans around their equity compensation, including Restricted Stock Units (RSUs) and company stock options. With over 15 years of experience in financial services, Carla has in-depth knowledge and expertise geared toward helping clients with complex financial situations. She enjoys boiling down complicated scenarios through practical examples and down-to-earth conversations.