Frequently, my retired clients give me the following directive: “Don, make our money last as long as we do.” To help them understand this complicated financial planning challenge, I have developed an illustrative spreadsheet called “Retirement Cash Flow Analysis.”
Estimating income needs
First, my colleagues and I will analyze the amount of money each client will need throughout his or her remaining years.
Next, we will determine income sources and amounts such as Social Security benefits, pensions, annuities and job income. Of course, all these projections are adjusted for inflation.
Computer software makes multiple calculations for each year to tell us whether we have too little or too much income. In the case of withdrawing too much too soon, the computation delineates the year (age) that the client obtains that undesirable state of “more life—not enough money.”
To make these projections, we must make some assumptions. The more accurate the assumptions, the more realistic our findings will be.
Therefore, give adequate time and energy to developing the assumptions you use for your clients’ analyses. You may develop your own, but realize that mine are well-tested.
At first glance, developing this spreadsheet may seem harder than it really is. For those readers who are proficient with spreadsheets, it is a piece of cake.
For those less proficient, there are many software programs that create variations of this cash flow report. Whether you develop your own or buy the software does not matter.
However, having this information is a necessity if you work in the retirement planning market. I do not know how any client can decide to retire and live comfortably without having this critical information.
If the calculations indicate that the client will run out of money before running out of life, and there is time prior to the retirement date, you can determine how much money needs to be invested each year until retirement.
My software requires you play this “what if game” of trial and error to determine the required amount. Other more sophisticated software, of course, will also do this automatically.
If your calculations determine that your client will have lots of money left over, say at age 100 (I assume all my clients will live at least to age 100), it would be proper to increase spending to use excess income. This will give the clients a higher standard of living. In many cases, I have found that clients currently in their 70s and 80s just cannot allow themselves to spend more money. They were conditioned early in their lives to save and to be frugal, and this behavior is difficult to change. As their financial advisor, a big hurdle is to give them the permission to spend. But it sometimes takes time to convince these folks, so be patient. You have to understand the post-Depression mentality of these clients; they are not like their offspring—the affluent Baby Boomers.
You can develop other hypothetical scenarios, such as assuming a spouse dies at a certain age or long-term care is a required expenditure for several years. Other planning scenarios might involve a regular gifting program or a comparison of a fixed annuity payout versus a variable annuity payout.
There is probably nothing more revealing or more critical in retirement planning than the information developed from a retirement cash flow analysis. Do not leave your office for a client meeting without this tool.
Next month, we will discuss the largest financial market of the future: asset allocation for individual retirement accounts.
Donald Ray Haas, CLU, ChFC, CFP, MSFS, of Southfield, Mich., has been an insurance agent and financial consultant for 45 years. He can be reached at 248-213-0101 or at Donaldhaas@aol.com.