Close The Case With Cash Flow Analysis

Given today’s economic climate, clients are more careful than ever about planning for the future. Even the most well-designed estate or charitable planning strategy runs the risk of being rejected by skeptical individuals who have seen the markets, and their financial lives, turned upside down. A common reason for such rejections: Clients, even those with significant wealth, are concerned that they (or their spouse) will run out money.

Many of the best estate or charitable plans involve giving away or giving up control of assets. Even those vehicles that allow clients to retain some control or benefit, such as a charitable remainder trust, cause many clients to ask, “Am I okay if I implement the plan?” Too few financial services professionals are able to assure their clients on this point because they fail to include a cash flow analysis as part of their process. The analysis is a remarkably effective tool in calming the client.

Presenting a cash flow analysis

Some of the planning techniques shown to clients are so complex that many advisors spend most of their time explaining the concepts. Unfortunately, the concepts are frequently presented on a stand-alone basis without helping clients understand the effect on their financial situation. From a marketing standpoint, a cash flow analysis should be included in any presentation when the advisor makes a recommendation to transfer assets.

The analysis itself can be basic or complex. In either case, cash flow planning enables clients to determine if they will accomplish their goals and live the lives they desire by comparing income sources with income uses and by determining the effect of income flows on assets.

Typical estate, charitable, and life insurance planning presentations start by analyzing clients’ current situation. These presentations then focus on how much future generations or charitable beneficiaries will benefit (or how much tax will be saved). While they understand why the strategy is desirable for the family or charity, many clients are uncomfortable paying premiums or giving up control because they are unsure where this leaves them and their spouse.

The marketing value of a cash flow analysis is the ability to look at a host of “what if?” situations. Projecting the effect a proposed strategy will have on the client’s cash flow over their life expectancy will help them to make informed decisions regarding their objectives. Knowing they will not run out of money, even when implementing the proposed strategy, is the key to assuring the needed peace of mind to move forward.

Many financial professionals believe there are 5 basic challenges in retirement income security planning. Most clients, even highly affluent clients, are concerned about these risks. In our analysis we educate our clients about them and assure our cash flow analysis takes them into account. They are:

(1) Timing and withdrawal rate risk– What do you do when you’re taking income from investments while the market is dropping? Is your withdrawal rate sustainable during your lifetime?

(2) Asset allocation risk–What do you do if you find that your investment portfolio is too risky or that it can’t generate an acceptable rate of return to support your income needs over the long run?

(3) Inflation risk–What do you do to offset the continuous increase in the cost of living?

(4) Longevity risk–With people living longer, are you sure your strategy will allow you to maintain your standard of living for an extended period without running out of money?