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Retirement Planning > Retirement Investing

Make Assumptions And Realities Click In Clients Retirement Plans

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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%.

==Inflation rate. For the past 75 years, the average annual cost of living increase has been 3%. Significant deviation from this percentage could produce unrealistic results and a lack of trust and criticism of the advisor.

==Annual income needed. Approach this as if your client were to retire today and project the amount, adjusted for inflation, to the retirement date.

==Annual mortgage payments and date the mortgage will be paid off.

==Social Security and pension benefits. Social Security and some pension plans have inflation adjustments that must be factored in.

==Other income. For example, factor in deferred compensation and annuities that will be annuitized.

==Income needed from other investments. This encompasses investments from which money can be withdrawn to balance the budget, including principal withdrawals, if necessary.

==Adjusted net worth. Determine all assets that could be used to create retirement income, excepting the client’s home and personal property.

==Life expectancy. Avoid estimating too conservatively and do not use a life expectancy at birth table. Instead use the 2000 Annuity Mortality Table, which is better for planning purposes these days.

In addition, consider the table for a husband and wife who have both lived to age 65 to determine how long at least one of the spouses will live. Currently, that is between the ages of 90 to 95 on average (meaning half of the group is still alive in their 90s). Remember, all tables or other evaluation procedures are estimates, so protect yourself and your client by estimating on the high side.

Donald Ray Haas, CLU, ChFC, CFP, RFC, RFG, MSFS, AEP, Registered Financial Gerontologist, is president of Haas Financial Services, Southfield, Mich. You can e-mail him at [email protected].

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


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