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Helping Clients Set the Date—For Retirement

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As a financial advisor, how many times have you heard this one: “So, when do you think I can afford to retire?” It’s one of life’s really tough questions, and, by all appearances, more Americans are turning to their advisors for an answer. In fact, according to the National Association of Plan Advisors (NAPA), more than 70% of 401(k) plan participants cite generating adequate retirement income as their number one concern. The good news is that you should be particularly well-equipped to give them one.

We’ve talked before about taking a holistic view of your clients’ assets…well, this might be the ultimate use of that aggregate look. In practice, helping clients determine if they can afford to retire will require you to identify all the critical variables for their financial security and success. That’s a lot of fact-finding.

You’ll need to discuss variables including your client’s savings rate, earnings curve, inheritances, personal and qualified plan assets, risk tolerance and, of course, life expectancy. But you’ll also need to make a few qualitative assumptions about personal issues like college expenses, vacation homes, healthcare and even inflation. (There is, after all, a big difference between living in Boise and San Francisco.) And, as much as we might like, we can’t forget the dues we owe to Uncle Sam.

Armed with that good information, and good financial planning software, you can then discount all those cash flows back into today’s dollars and compare the results: how many assets your client actually needs to be financially secure versus how many net financially productive assets he or she will actually have at different points in time. (Nothing’s chiseled in stone, of course, so don’t be afraid to run a number of models or “gap” analyses with various assumptions.)

On a graph, the results of your cash flow analysis will look something like the one shown below. The point where the upward sloping curve (the asset accumulation line) intersects with the downward sloping curve (the asset requirement line) shows mathematically where the client can afford to retire. There will be enough assets at that point to fund expected expenditures over a lifetime.

Click to enlarge

Before that point of intersection is reached, you’ll see a “financial security gap,” which is the difference between what your client will need to be secure and what he or she has today. You might want to talk about bridging that gap, in part, with life insurance to help protect a spouse, if applicable. On the other side of the intersection—the “surplus portfolio”—there’s plenty to talk about as well. More, in fact. Beyond advice on gifting, wealth transfer strategies and charitable giving, your client will need some real help making intelligent decisions about qualified plan distributions and rolling over 401(k) accounts to protect those assets from taxation as long as possible. It’s all about building a portfolio that has the productive power to fund after-tax lifestyle expenditures over increasing life expectancies.

Once you’ve put all that hard work into building the model, it’s fairly easy to freshen it up every year or so. Fortunately, there are some powerful personal financial planning software packages and 401(k) plan participant advice applications that can help streamline your advisory process and business. 

Along the way, you’ll be building a work statement for your client and a holistic understanding of that client’s finances for yourself. Altogether, it’s the best way I know to win at this game over the long term.


Author’s disclaimer: For investment professional use only. The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. Diversification does not guarantee a profit or guarantee protection against losses


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