Look at Both Sides of Retiring Clients' Balance Sheets

Advisors need to focus on clients assets and liabilities in retirement

Many financial advisors take, I believe, too narrow a view of their retiring clients’ finances to give them the most effective advice. To illustrate my viewpoint I will use the concept of the balance sheet, with assets on one side and liabilities on the other. During the accumulation period it is natural and appropriate to focus just on one asset, investable assets. But that should change when a client is considering retirement, most especially for those who have barely enough, or not enough, to maintain their lifestyles. At that point the other assets should come into consideration: the house and the ability to work and earn money, even during “retirement.” The proper use of these other assets can play a crucial role in helping people make the best decisions about how aggressively to invest and how much to spend, and whether it is worthwhile to try to earn more money. There is too little discussion, I believe, about the most effective way to utilize the equity in the home during the course of retirement.

The liabilities of retirees are their debts and expenses. There are three types of expenses. The first are the uncontrollable, but predictable expenses, such as food, clothing and transportation. The second are the controllable expenses such as entertainment, travel and gifts. These can contract and expand as investment returns vary. The third are the uncontrollable and unpredictable, such as the cost for major illnesses, long-term care and major financial problems of children. A different financial strategy is needed for each, including the use of financial cushions and home equity, and, in some cases, insurance for the uncontrollable and unpredictable.

Too often the advisor just looks at the investable assets and tells the client that they can safely spend 4% to 5% of these assets in the first year of retirement and plan on raising that by 3% a year. That is not a good enough analysis and does not help the client make the best decisions.

I think if more advisors sat down with their clients and showed them a balance sheet with all their assets and liabilities, including the risk of unpredictable expenses down the road, better decisions would be made.

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