My partner and I recently met with a couple from one of our workshops whose financial life is quite complex. These folks have done well for themselves. They lived well within their means throughout their working years, managed to consistently save for retirement, and have successfully accumulate more than enough resources to maintain their desired retirement lifestyle. Kudos to them.

Their retirement resources reasonably support their desired standard of living, and they have an overwhelming desire to give back to others. It’s truly inspirational.  They are not in jeopardy of running out of money in retirement. They could sustain substantial market losses, pay unnecessary taxes, and pay too much for substandard investment advice and their inflation adjusted retirement lifestyle would not feel any noticeable impact. In other words, they’re in a financial position to absorb significant inefficiencies from a planning perspective without blinking an eye.

Forced Choices

However, from a prudent planning perspective there is much work to do. If one is serious about making improvements and willing to put in the effort there’s much to potentially gain from a comprehensive planning process.

The difference between a well-crafted plan, and a sloppy plan, would significantly improve this couples potential to impact the organizations that they are already committed to supporting financially. Choosing between maintaining their lifestyle or maintaining their annual increasing contributions to charities they support may be eliminated with improved efficiency. Paying more in taxes than they are legal required, a poorly timed bear market without a loss avoidance strategy, and a slough of other retirement risk may potential impede their ability to significantly increase their desired outcome.

Sloppy planning could lead the couple down a path that requires them to make choices in the future that they would rather not have to make. For example, should they continue enjoying a retirement lifestyle that they have become accustom to and scale back their plan to fund organizations they support, or let inflationary pressures erode their standard of living and continue increasing their benevolent contributions as desired.

Keep It Simple

Many advisers in our industry still follow this mantra. The rely on simple tools to help them plan for their client’s future. A legal pad, pencil, and calculator are their primary planning tools. They use their tools to do “good work” for their clients. Perhaps good work is not good enough. Don’t you deserve better? Perhaps we should strive for excellence in our profession.  Is being satisfied with “Good,” not striving for excellence, acceptable by your standards?

Let me be frank, I don’t think an advisor can do what is necessary to act in your best interest unless he’s considering all of the necessary data, and a myriad of factors that impact the outcome.

To be fair, I’m not a human super computer. My own abilities are limited in that regard. I’m not capable of making thousands of calculations per minute, or managing my client’s entire financial profile in my head. My mind is not a filing cabinet. Therefore, in fair disclosure, I am biased towards leveraging planning tools where other financial professionals with fare superior brains can get by with a yellow legal pad and a writing utensil.

Great Work Requires Thorough Planning

Allow me to explain. I do not believe that I, or any other adviser, is capable of acting in a prudent manner with loyalty to our clients unless we take into account all relevant details about their financial lives such as the following:

1. Your Retirement Resource

Your retirement resources include both your retirement income sources, and your retirement assets. Retirement income for example would be your Social Security, pension if you’re fortunate to have one, and any other source of continuous lifetime income you have to your name. Strategies to get the highest benefits you are entitled to should be examined and considered. Your retirement assets on the other hand include accounts like employer sponsored defined contribution plans (401(k)s, for example) individual retirement arrangements (IRAs), nonqualified brokerage accounts, and other personal savings. These accounts should be strategically harvested to supplement your retirement income and compliment your retirement income sources.

2.Varying Rates of Return and Interest Your Assets Might Earn

Every single retirement asset dollar has a specific purpose and timeline. Interest rates earned and rates of return on retirement assets will very widely depending on the savings and investment vehicles you choose. Dollars allocated to highly liquid relatively safe savings vehicles like a money market account earn a lower rate of interest. High-risk high potential investments offer more opportunity for accumulation, but carry risk of loss. Each retirement asset you own plays a significant role in determining the overall portfolio rate of return you earn. Advisors who apply a blanket portfolio rate of return across all asset classes for simplification purposes are irresponsible, and may lead to you to under estimating or overestimating you actual portfolio returns.

3.Current and Future Tax Liability

Taxation of income sources and the impact of supplemental consumption from various types of retirement assets will impact the overall efficiency of a plan.

Depending on the tax status of each retirement resource, how and when you consume the resources will impact whether you pay more taxes than what is necessary under current law. If you’re not a licensed tax professional, working with one is advised. However, understanding how and when to harvest specific resources is a critical component of a comprehensive retirement income plan.

4.Cost of Living Adjustments

The cost-of-living, and maintaining a lifestyle is impacted by current and future expected expenses. Potential unexpected expenses should be planned for as well. The impact of inflationary pressure on those expenses cannot and should not be ignored. For demonstration purposes let’s look at a specific slice of a retirement income budget, the cost of homeownership. If my clients owns a home and has a mortgage, expected expenses might include mortgage principal and interest (P&I), property taxes, and insurance. For example sake, the mortgage principal and interest, taxes, and insurance total $2,000 per month or $24,000 per year. Adjusting for 3% inflation my client would need $4,000 or $48,000 worth of income to maintain that standard of living 25 years from now. However, mortgage P&I don’t inflate. Your P&I payment on my mortgage is constant. They also drop off when you make my final mortgage payment. On the other hand taxes, and insurance do inflate, and they don’t go away when I make my last payment on your mortgage. Some expenses are inflated, and some are not. Some expenses will go away, and some expenses will not. Some expenses might occur at a future date and need to be planned for even though my client is not experiencing them today.

5.Isolating Cracks and Recommending Action

Identifying retirement risks is critical to planning as well. With all of the data gathered, and organized, now we can shine a spotlight on cracks in someone’s current plan. Some of those cracks we may be able to eliminate, and some of those cracks we may be able to be mitigated. Other future cracks like changes to the tax rates we have no control over, and we must manage around them as best we can. Either way, without getting a clear picture of everything and how it all works together I couldn’t possibly act in a prudent manner in the best interest of our

Once the heavy lifting is complete, and recommended actions are to be acted upon, we can go in search of the most cost-effective strategy that provides the most economic benefit for the client.  However, any product recommendation prior would be premature and considered financial malpractice in my opinion.

Wake Up Call

Am I saying that it is unlikely an advisor could take a thorough inventory of retirement resources, complete a comprehensive analysis, and draft a blueprint for a successful retirement on a legal pad with a pencil and a calculator? You bet I am! Could an advisor do something “good” for a client and improve his or her circumstances? Sure. But striving for excellence on their behalf? I don’t think so.

In fact, if an advisor is not using tools to manage all of this data, organize the facts, and then spotlighting weak points in the plan before recommending actions to fix those weak points, is he just selling stuff?

“Investment Adviser Representative of and advisory services offered through Royal Fund Management, LLC, a SEC registered investment adviser.”

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