Education really never ends, but at least for income planning a pertinent question advisors are asking is, when does it begin?
When the question was posed to financial planners, there was an overwhelming and diverse response. The planners spoke not only of when the education should begin and when it should begin in earnest but also of how it should be taught, how actively financial advisors should pursue it and how to incorporate the education as well as the financial planning component of income planning.
‘Start early!’ was the refrain, over and over again.
“I’d suggest that income planning start at about age 5,” says Norman M. Boone, a certified financial planner with Boone Financial Advisors Inc., San Francisco.
“Seriously. That’s when the kids start to get allowances and their training for how to make it last until the next paycheck [allowance].”
Starting income planning education 5 years before retirement “is way too late for most people,” Boone adds.
“The sooner the better” is the approach he prefers. “That allows you to make fewer sacrifices [since they are spread out over a longer period].”
And, he continues, income planning education is a process. That process starts with determining how much capital will be needed over a number of years, with a typical assumption ranging up to 100 years, he says.
Often, Boone continues, adjustments may have to be made over time. Examples include working longer or saving more. “Since it usually doesn’t work perfectly the first time, it becomes an iterative process to see what clients are willing to sacrifice to allow them to be able to retire comfortably,” he says.
The earlier the better to have the discussion on income planning and to help a client reexamine expectations, says Dave Moran, a certified financial planner and senior vice president with Evensky & Katz, Coral Gables, Fla.
Moran says he works with clients to help them understand that timing is key. Additionally, he says it is important to establish a cash reserve of at least 2 years of living expenses during retirement and to develop an investment policy that provides a meaningful ‘total return’ within a risk profile.
Income planning and the education that accompanies it should start at the “inception of a client relationship,” according to George Middleton, a certified financial analyst and certified public accountant with Limoges Investment Management PC, Vancouver, Wash.
But, a client’s initial response, he says, is often, ‘I have no idea.’ Consequently, a planner needs to drill down to issues such as current spending, changes in lifestyle upon retirement and medical issues, he adds.
As a client draws closer to retirement, the calculations for income planning become more precise, he adds. And, the education process leaves more room for ‘what if’ discussions, Middleton adds.
Eve Kaplan, a certified financial planner with Kaplan Financial Advisors, Berkeley Heights, N.J., says that even though younger clients may have other priorities–e.g., paying off a mortgage or paying for the children’s college education–it is still important to start thinking about income planning. But, according to Kaplan, many clients already come to her with an understanding of the need to start thinking about it. By their 40s and 50s, it becomes more of a high visibility issue, though.
Most understand the need to create momentum to start saving, Kaplan says. But what they also need is to understand the impact of expenses on investments and the impact of purchasing a fund with “A” shares with a 5.75% upfront load. Educating clients on expenses also plays a role in income planning, she explains.
For older clients, monitoring expenses is an area that they generally need more assistance with than income planning assistance, says John P. McFarland, a certified financial planner with Life Plans of Richmond, in Midlothian, Va. The structure of a financial plan is as important as the cash flow derived from a client’s assets, he notes.