Reaching the Right Amount at my “Plan End”

Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

You’ve probably heard someone (morbidly) joke, “When I die, I want my last check to bounce.”  For some, spending your last dollar on your last day would be considered a success. However, in the world of financial planning, we would consider it playing with fire.  This mantra might seem like the ideal situation in a perfect world, but the reality is simple – we do not live in a perfect world!  I believe having “excess” at the end of your financial plan is a product of thoughtful, prudent planning by the client and advisor.

The goal of the vast majority of our clients is simple: Don’t run out of money in retirement.  So how do we help clients make that happen?  When building a new plan or updating a client’s existing retirement analysis, we use a combination of sophisticated technology and good, old-fashioned human knowledge and expertise.  When you put the two together and have a client who is realistic with their goals, it’s typically a recipe for success. 

Tapping into Technology

Our financial planning software takes a look at many different factors (age, life expectancy, income, savings rate, retirement income sources, portfolio value and allocation, etc.) when testing the probability of success of the sustainability of a client’s financial plan.  As with anything, there has to be a balance.  We see some who are spending far too much in retirement and the software puts up red flags. We also have some families who live well below their means in retirement and could actually spend a lot more than they do.  The key, as with anything in life, is finding the appropriate balance. 

Can’t We Spend More?

When I’m walking a client through their retirement analysis, looking at a plan we consider to be in good shape, they often get a perplexed look. It happens when they see an estimate of the value of their investable assets at age 95 or “plan end”.  For example, I recently met with a couple in their early sixties. At age 95 (in the year 2048!) they had an estimated $1.2M left at their “plan end”.  The couple had a goal to spend approximately $70,000/yr in retirement (including Social Security) and had a child who they felt did not need the $1.2M the software program was telling them they would have left upon death.  However, when we dug into the numbers, we showed them that the $1.2M in 2048 (33 years from now) is really the equivalent of just over $450,000 in today’s dollars if we factor in the negative effect inflation (3% assumption) has over your purchasing power.  However, in their minds, it was still a good chunk of change to leave as an inheritance.  They were still stuck on that $1.2M – couldn’t they spend more?!  While this was an extremely fair and logical question, my answer was yes. But next I explained that the likelihood of having to adjust their current spending habits downward at some point in the future would increase.  The reason for this is because we want your plan to have a “cushion” or “buffer zone” for the unknowns we haven’t fully factored into your plan.  Things like unexpected medical events, long-term care needs, helping out family, extended periods of negative market returns, etc. can all eat into that “cushion” or “buffer zone” pretty quickly even though on paper, it looks like a large amount today. 

The bottom line is this – financial planning is an ongoing process.  Meeting annually, tracking progress, making adjustments when necessary and being consistent is planning done right. This approach has helped thousands of our clients feel confident during their 20+ years after working. While spending your last dollar on your last day might seem like the Holy Grail, it isn’t something we strive to do for our clients.  Life is full of unknowns. That is why we plan and work together with you to make sure when those unknowns eventually do occur, you will be properly prepared.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Any examples provided in this material are for illustrative purposes only. Actual investor results will vary.