Baby boomers have long been known as enthusiastic consumers. So, how do you convince your boomer clients to spend less and tuck away more for retirement while they are still earning incomes?

Boomers’ penchant for spending — and overspending — doesn’t appear to be slowing as they head into retirement. A recent survey of Canadian households’ attitudes to debt, commissioned by the Certified General Accountants Association of Canada, found that the proportion of savers among Canadians aged 45 to 64 decreased more than 11 percentage points to 54.9% in 2001 from 66.1% in 1982.

“Such an increased propensity to outspend income among households approaching retirement signals a certain absence of adequate readiness to retire,” the report says.

With the beginning of a new year, you may want to suggest your boomer clients take a hard look at their spending habits. Stephanie Holmes-Winton, an independent financial advisor in Halifax, says the problem is that most people don’t realize how much money they fritter away. “I see entire monthly mortgage payments going to specialty coffee shops,” she says. “Clients who buy a latte and a muffin every morning are spending $7 a day. That’s $140 a month — and that’s if they only buy one latte a day.”

Scott Gerlitz, a financial advisor with Edward Jones in Rocky Mountain House, Alta., considers it an advisor’s role to give clients a reality check. “We have clients fill out detailed budget worksheets to see how much money is being drained by the coffees, the lunches, the CDs,” he says. “People are shocked when they realize how much is going into these things.”

Easy credit is another big culprit, he adds: “Credit and debit cards. And, with house prices skyrocketing in Alberta, homeowners are being offered higher home equity lines of credit.”

People don’t seem to realize that credit comes with a price. A fall 2006 survey of Canadians’ spending habits commissioned by Toronto-based Mackenzie Financial Corp. found that 22% of Canadians don’t know the interest rate they pay on unpaid balances on the credit card they use the most.

“I call it ostrich spending syndrome,” Holmes-Winton says. “And these are the same people who will call me saying they can’t afford to make an RRSP contribution this year.”

She insists her clients look at their RRSP contribution or other savings targets as payments that are non-negotiable: “You don’t tell the hydro company that you can’t pay its bill this month. Clients have to view their RRSP contributions in the same way. I recommend, on average, that clients put away 10% of their net income. But it depends on the client. If a client hasn’t done much saving up until now, he or she may have to put away 15% or 20% of net income.”

But Holmes-Winton doesn’t believe in making budgets. “It’s a waste of time to add up your expenses,” she says, “and figure out the difference between them and your take-home pay because most of your fixed expenses are non-negotiable. And unexpected expenses have a way of cropping up, such as a roof repair or a furnace that needs to be replaced.”

John Podlewski agrees that budgets can be misleading. “Say you have $2,500 a month for your living expenses and you want to buy a $5,000 hot tub,” says the president of Debt Freedom Group Inc. , a financial advisory firm in Burlington, Ont., that focuses on helping clients manage debt. “The sales clerk will persuade you to buy it on an installment plan and you think the payments will fit into your $2,500 budget. But by the time you finish paying for it, you’ll have paid several times what the tub is worth.”

Holmes-Winton recommends clients use cash for all discretionary spending. “I normally recommend they give themselves a cash allowance of 10% of their net monthly income,” she says. “They should take a quarter of that amount out of the bank every week and, once it’s gone, that’s it for the week. They’ll start deciding what their spending priorities are.”

This amount should include spending on and allowances for the clients’ kids. “And they should fill the kids in on what they’re doing,” she adds. “They’ll learn that money doesn’t grow on trees.”

Podlewski, likewise, tells clients to use cash whenever possible. “My biggest pet peeve is seeing people using credit cards to pay for groceries,” he says. “Perishable items are not something that should be financed. Neither is entertainment. Use cash for your entertainment — at restaurants and for movies.”

@page_break@Tom Reid, director of consumer solutions at TransUnion Canada in Toronto, a major credit-reporting company, says managing credit effectively will help consumers establish a good credit rating, which is critical in applying for loans, mortgages or even renting office space. He says successfully managing several types of credit — credit cards, a line of credit, a car loan and a mortgage — can boost a credit score.

But some people can’t manage debt and a wide array of available credit compounds their problems. They have to reduce the amount and kind of debt they hold. “Just as investment diversification works on clients’ behalf, debt diversification — mortgages, several credit cards and lines of credit — works against them,” Holmes-Winton notes. “All that debt is compounding and growing.”

Podlewski suggests clients organize their credit cards from the highest to the lowest interest rates. “I tell them to make the minimum payments on all the lower-rate cards and use the rest of the money they used on credit card payments every month to start paying off the highest-rate card,” he says. “When that card is completely paid off, I tell them to cut it up, and repeat the process to pay off the second-highest card — and down through the entire stack of cards until they are left with only one card. That will be their only credit card.”

Gerlitz favours paying off higher-interest cards with a low-rate line of credit. When debt is at a manageable level, continue monitoring it.

“I tell my clients to call me whenever they are making a financial decision,” he says. “Something that seems as small as getting another credit card can have huge repercussions.” IE