As more Americans live longer, a new budgeting worry has become increasingly more common — the fear of running out of money before they run out of time. When the “official” retirement age was set at 65, the average life expectancy was 61, but today someone retiring in their mid-60s could easily live another 20 or 30 years. That helps explain why in a study released last year by Northwestern Mutual, some 78% of Americans voiced concerns about not having saved enough for retirement.
Therefore, it becomes obvious why it is so crucial for advisors to work with clients to develop comprehensive financial plans that take longevity into account. That’s also an area where a reliance solely on goals-based planning can fall short.
A client’s long-term goal may be to achieve a certain net worth, a figure that will have them “set for life” and ensure a comfortable retirement. But achieving a net worth goal, whether it’s $1 million, $10 million, or more, won’t necessarily give clients what they need to maintain their lifestyle if it’s not supported by a plan that provides for ongoing income and cash flow management.
Many people will have a large portion of their net worth tied up in illiquid assets, such as their primary residence. Owning a $5 million home doesn’t solve the problem of paying this month’s cable and internet bill. Unless that asset is liquidated, meaning the home is sold, it’s useless for paying bills. It’s not net worth that matters in retirement, it’s how much is available to spend every month.
Crafting a Strategy
Understanding a client’s short- and long-term goals is just the first step in crafting a strategy to help them realize that those goals and needs must be accompanied by a long-range strategic plan that considers both cash flow and income during retirement.