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October 05, 2005 at 08:00 PM
While most clients want to maintain a comfortable lifestyle after they stop working, 80% of baby boomers say they will continue working, at least part time, during their retirement. Few clients comprehend how much money they will need during retirement. Thus, the financial services industry can provide a much needed service as the boomers approach retirement age: to help them create sufficient wealth for the future.
The two most important components of a successful retirement planning process are flexibility and thoroughness. In my practice, I recognized the pressing need to communicate the multiple assumptions that are made as each client’s plan is developed after a thorough needs analysis of his/her situation is completed. To help clarify and illustrate where my clients’ income and investments needs are today, as well as plan for future shortfalls, I have developed a one-page “Retirement Cash Flow Analysis,” which provides them a snapshot of the future for planning purposes.
Illustrating Retirement Cash Flow
The first thing I discuss with clients are the multiple assumptions that are used to project future income needs at retirement and during their golden years. To illustrate these assumptions, I use a spreadsheet, creating a year-by-year flow chart.
Be sure the flow chart you create for clients illustrates the following: inflation; adjusted annual income; annual mortgage payments; and all sources of income such as Social Security benefits, pension(s), earned income, annuities and deferred compensation. If applicable, the chart should clearly indicate what year your client will begin to have an income shortfall.
If there is a deficit, calculate the amount of annual accumulations needed, the amount of reduction in standard of living, or a combination of the two. If there is a surplus at an estimated year of death (i.e., age 100), calculate the increase in standard of living possible.
Your clients need assistance in developing valid assumptions and producing reasonable projections for their potential long life expectancy. Baby boomers will appreciate this much needed financial service because many already fear outliving their retirement nest eggs.
Retirement Plan Assumptions
There are many assumptions that could be considered, however, the most significant are:
==Retirement date. Some clients say they will never retire. So, I tell them: ‘So be it; however, just in case you must retire due to health reasons, lack of satisfactory employment, the need to assist others, or you just change your mind, let’s select a reasonable age at which you’ll be prepared for this future time of financial independence.’ Recent trends show that many more retirees are waiting to stop work at a much older age than in the past, and this will have a major impact on our industry.
==Year of birth. While it is a fact and not an assumption, it is vital to the planning process.
==Return rate. This could be based on a rate of return mutually agreed upon by the financial advisor and client. With a properly balanced investment portfolio, that has a heavy emphasis on equity-type vehicles, a reasonable range would be 6% to 7%.
