Key Takeaways
Social isolation not only compromises mental health but can trigger financially destructive behavior as well.
Underspending can impact the financial goals you set out to achieve.
Even charitable giving can result in reckless and harmful behavior if left unchecked.
Mental health plays an important role in your financial health and your Livelihood.
Even with COVID generally in the rearview mirror, some of our clients, regardless of age, are still hesitant to venture out. Volumes have been written about the physical and emotional toll that social isolation takes on people, and it can have an adverse impact on your finances too.
For instance, someone who feels lonely or socially isolated may be more likely to overspend on Amazon or Door Dash. That’s because the package or food arriving at the door is a form of interaction with the outside world and the delivery provides a brief dopamine rush to the pleasure center of the brain. Another factor driving this trend is that many people feel they have lots of excess discretionary cash because they’re not dining out, taking trips, or going to concerts or sporting events.
In fact, a University of Michigan poll found that more than half of U.S. adults over age 50 (56%) said they felt socially isolated, twice the level of 2018. And other research shows that the isolation caused by health crises, such as epidemics and pandemics, can trigger compulsive buying and spending.
While “retail therapy” can provide immediate gratification, it’s often as addictive as drugs or alcohol and it can have devastating impact on one’s finances and psyche if left unchecked. Impulsive spending can be harmful if you’re behind on your retirement saving goal or if you’ve had other recent financial setbacks—job loss, divorce, death of a spouse, major medical emergency, to name a few.
Not Spending Enough
On the flip side, we have elderly, socially isolated clients who now have larger funds to pass to their heirs. That seems great, but they may not be maximizing their retirement now, so it’s a conversation to have with them.
One of our 80-something clients is a vivacious woman who before COVID, loved going to New York City regularly for museum visits and Broadway shows. Now she’s afraid to resume her favorite activities due to fear of being infected. She has $5 million accumulated and no children or grandchildren to pass on her wealth. Over-saving is another example of not optimizing one’s retirement plan. Now is the time for her to be enjoying the money she’s worked so hard to save. If not, her estate could be looking at a significant tax hit when she passes on, especially if she lives past 2025 when the estate tax exclusion sunsets. Although times may be a bit different, there are other ways to maximize her retirement in a comfortable manner for her.
Charitable Planning
For clients like the woman above, we understand the reluctance to spend (and the risk health exposure to viruses) but now is the time to revisit planned giving discussions, especially if they have few heirs to whom they can pass on their wealth. Rather than writing lots of individual checks to charitable causes, she is a good candidate for a donor-advised fund (DAF), a qualified charitable distribution (QCD), a charitable remainder trust (CRT), or even a private foundation.
QCD: For instance, once they hit age 70.5 or begin taking required minimum distributions (RMDs) from their retirement accounts between ages 73 and 75, they can instead do a QCD which allows them to donate up to $100,000 total to one or more charities directly from a taxable IRA -- instead of taking their required minimum distributions. In addition to the psychic satisfaction such giving provides, there are several tax advantages. CRT: We’ve helped several of our high-net-worth clients set up charitable remainder trusts. CRTs allow you to donate assets to charity in a tax-advantaged way and draw annual income for life or for a specific time period. At the end of that period (or you and your spouse’s death), any value remaining in the trust is dispersed to the predetermined charity rather than to your heirs.
Health Is Wealth
Isolation and depression can shorten your lifespan and can deprive middle-aged and older people of the support system they need to help them navigate financial challenges. For younger people, isolation can deprive them of social interaction and access to networking for jobs.
How Can Novi Help
If your goal is to pass money on to future generations and/or your favorite causes, we can help you do that in a tax-friendly way. At Novi, we believe very strongly in supporting charitable causes. We don’t charge for setting up a donor-advised fund and many other types of charitable planning vehicles. We also help clients feeling isolated connect with community resources for social gatherings and we help them maximize their retirement by discussing a spending plan that’s appropriate for their “new normal” lives.
While the past three years have been extremely challenging for so many of us, it has also allowed us to have some of our most enjoyable conversations with clients. Another of our 85-year-old clients was very worried about passing on her wealth to her heirs. She was constantly worried about her account balances and fluctuations in the markets. Her kids don’t want to inherit the money a decade from now; they want to spend quality time with her today. So, we told her to rent a big beach house for the week, invite her entire family along, and have a great time together. That’s exactly what she did, and the vacation provided more joy to her and her family than any amount of inherited money could provide.
No one likes to see their account balances decline, especially when retired. But, if they follow the plan we’ve devised for them (based on their risk tolerance and goals) and we’re telling them it’s okay to spend X amount of money every year, they’ll be much happier and still have peace of mind.
Conclusion At Novi, we’re not just focused on the math side of your financial life, we’re also focused on the emotional side. If you or a family member has questions about your finances, social isolation, or anything else keeping you up at night, please reach out any time. We’re happy to assist.
BRENDEN LEESE, CFP® is an Associate Wealth Advisor at Novi Wealth Partners