Building a Successful Retirement Plan
Posted by DAI Life Brokerage Services on December 7, 2012 · Comments Off on Building a Successful Retirement Plan
Evaluate your client’s lifestyle’s needs and conduct an income resources inventory.
Helping a client create, implement and enjoy a successful retirement plan can be one of the most rewarding and appreciated services a financial advisor can provide. This can be the key to a long-term client engagement that is mutually rewarding. It is simple to develop a retirement plan by using the two steps below.
1. Evaluate your client’s lifestyle needs. The first step is to determine how much money a client will need to support his desired lifestyle, and what resources will be available.
This sounds straightforward: Work with your client to list the monthly expenses he incurs or anticipates through the course of the year. In reality, however, most clients find it difficult to determine this number and often forget about those “one-time” expenses for gifts, charitable requests, home repairs, etc. It’s easier, and often more realistic, to start with a client’s take-home (after-tax) pay and back out what he is saving once his paycheck hits his bank account. It’s a little more difficult when a client has a variable income. Ask these clients to consider the question: “How much would I need to send you on a monthly basis to pay your bills?”
The goal is to start a dialogue about the savings your client will need to retire. There will be plenty of time to refine and update this number as lifestyle priorities change. Often new information such as health-care costs or new hobbies can affect the number. We caution against the notion that clients will spend significantly less once they retire, since they will have more time to travel, spend time with family and spoil a growing number of grandkids.
2. Conduct an income resources inventory. The second step is to help the client conduct an inventory of his income resources. The three primary income resources are income benefits, such as pension or money from Social Security, investment income from his portfolio and human capital, which simply means his ability to earn a paycheck. Income benefits directly reduce the amount of money a client needs to save for retirement. For example, if his lifestyle need is $50,000 per year and he has pension or Social Security benefits of $60,000, he does not currently need other sources of income. However, he may need future income to offset the impact of inflation on these benefits.
If someone needs $50,000 and only has pension or Social Security benefits of $30,000, he needs $20,000 from other sources. We use a five percent initial withdrawal rate as a guide for how much a client needs to accumulate. This makes the math pretty simple. If he needs $20,000 per year, he needs $400,000 earning five percent. There are several excellent software programs that illustrate this well although the five percent number can be calculated on a napkin with pretty good accuracy.
Relying on human capital to create additional income during retirement is adequate initially, but few people want to count on earning a paycheck into their 70s and beyond. The most conservative approach is to have the client rely only on his investments to make up a pension shortfall.
The impact of inflation on your client’s calculations can be significant. We rely on the rule of 72, whereby if we assume a four percent inflation rate, the client’s cost of living doubles every 18 years (72 divided by four). Any rate can be used, but it’s important to make the client realize that he will want to keep his purchasing power throughout retirement.
Successful retirement planning is not an exact science since human behavior and financial market returns are unpredictable. It’s important to start the conversation with your clients and keep the goals real and alive. With a plan in place, your clients will be confident that they will have a successful retirement plan, and using the simple steps described in this article, you can make this happen. ■
By Gary Vawter for the November/December issue of NAIFA Advisor Today Magazine. Gary Vawter, CFP, M.S., is owner and principal advisor of Vawter Financial, Ltd., a wealth management firm in Columbus, Ohio