Help clients plan for worst case, moderate and best case scenarios

Planning for retirement is tricky. So many of the financial variables are beyond one’s control: gasoline prices rising dramatically from one day to the next, the stock market fluctuating up and down, and unexpected medical expenses being paid out of pocket.

These variables can wreak havoc with retirement plans.

Unfortunately, many of those planning for retirement, as well as many current retirees, have found that their best laid plans have gone awry.

The problem begins with those plans. When people make a retirement plan, they often assume unrealistically high returns on their retirement nest egg; underestimate expenses, especially for health care; and ignore the impact of having to sell stocks or mutual funds to generate income when the market is down.

It’s understandable why people do this. They want to have the comfortable retirement they deserve, so they manipulate their plans accordingly.

But what can advisors do to be sure that when clients start living their dream retirement, they will be ready for anything?

The answer is in the retirement plan, or more accurately, plans.

Although having a retirement plan is a start–so many people have none at all–one plan is not enough. Many successful enterprises have been achieved because those involved constructed a variety of scenarios–read plans–with a variety of methods for dealing with whatever scenario actually occurred.

Advisors can help their clients do the same by helping them design three different retirement plans: a worst case or subsistence scenario, a moderate scenario, and a best case scenario.

Worst: The worst case or subsistence plan involves putting together a plan of income and expenses that allows the client to meet survival needs but not much else. Expenses like housing, food, transportation, health care and other necessities would be met, but the client’s income would not allow any unnecessary expenditures. Items like travel, entertainment or eating out would not be part of the subsistence plan.

On the income side, this plan would be based on the idea that the client has to live on a predictable income stream coming from a pension, Social Security, annuity or some other income source that will meet those expenses. Of course, the reality is that many people are finding that supposedly predictable income sources like pensions sometimes disappear.

A true subsistence plan will balance expenses with income sources that are rock solid. The value of developing the subsistence plan is it helps clients realize that their dreams might be unrealistic, but it also helps those pessimistic clients who envision a less rosy retirement realize that they can at least survive.

Moderate: Retirement on the moderate plan would be a little more enjoyable. This plan is perhaps the most realistic. The advisor helps the client make reasonable assumptions about income using historical data to plan expenses accordingly.

Depending upon the number of years until retirement, the advisor can help the client adjust saving levels and modify expenses to create a plan that should work. Under the moderate plan, the client would budget for optional expenses like vacations or a bass boat.

Best: Last is the best case scenario. This is the plan that the client probably already has because of that tendency to underestimate expenses and overestimate investment returns.

The advisor may need to help the client adjust those expense and income estimates, but the best case scenario should assume the best: the highest earnings rate that a portfolio such as the client’s has earned in the past and expenditures in keeping with income generated by that portfolio. Each client’s situation will differ, but the best case scenario most closely matches that client’s retirement dream.

The secret about these three retirement plans is that all three scenarios will come into play during a client’s retirement. That’s why clients need three retirement plans, not just one.

One benefit of putting together these three plans is that clients can see they will need to make adjustments in their retirement, getting by on their subsistence plan in times of stock market decline and taking cruises when their income stream allows them to live their best case scenario.

The key to successful retirement planning is definitely plan for the best but also plan for the worst.

Kristen Falk, FLMI, AAPA, ACS, AIAA, AIRC, ARA, is a senior writer with LOMA in Atlanta, Ga. Her e-mail is falk@loma.org.

People often assume unrealistically high returns on their retirement nest egg and underestimate expenses