Five Steps to Help Your Retired Clients
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In the recently released Stanford Center on Longevity report entitled, “Disconnected: Reality vs. Perception in retirement planning”, the authors noted:
While retirement planning is highly personal and dependent on many different factors, there is an almost universal desire for “peace of mind” in retirement.
Given this near-universal desire, I will outline a relatively straight-forward retirement planning process that advisors can use to help their clients find financial peace of mind in retirement and help them make better financial decisions. My recommended process involves using the actuarial financial planner (AFP), a simple one-tab Excel spreadsheet available on my website that is more robust than most Monte Carlo models. I wrote about the AFP in my Advisor Perspective article of August 10, 2020 entitled, “How to Fix Retirement Planning Models.” My model is based on actuarial principles. It produces a household balance sheet and compares the present value of household assets with the present value of household spending liabilities.
Here is the recommended process.
Five easy steps to help clients enjoy financial peace of mind in retirement
- Help the client estimate their planned spending in retirement. These planned expenses will generally include future expected and unexpected recurring and non-recurring expenses, including future expected increases (or decreases) to these expenses.
- Check the spending plan developed in step 1 for financial feasibility by entering the spending plan, the client’s retirement assets and assumptions about the future into the AFP. The AFP produces a household balance sheet for comparison purposes.
- Compare the present value of the client’s planned essential expense spending to the present value of their non-risky investments. This step may involve delaying commencement of the client’s Social Security benefits or purchase of a single-premium immediate annuity (SPIA).
- Maintain the client’s “rainy day fund” at a comfortable (positive) level. This step involves managing household spending and investments so that the present value of the client’s retirement assets exceeds the present value of the client’s expected spending.
- Revisit the above steps at least annually to reflect changes in the client’s spending plan, retirement assets and in the assumptions used to calculate present values.
That’s it! You don’t need to be an actuary to make it work for your client (or explain it to them).