Our last post on The Fiduciary Advisor blog talked about decluttering and organizing our finances Marie Kondo style to spark joy. Most of us enjoy talking about our dreams and values, but financial planning to realize our dreams can be stressful without a straightforward approach.
To this end, we recently presented a webinar on creating financial plans as part of an educational series for participants in the employer-sponsored retirement plans we serve. We’ve also designed this series as a public service to help a broad range of viewers with the basics of financial planning.
So let’s break down our webinar in the simplest possible terms to help you get rolling with financial plan creation. To simplify this stage of the process, let’s just focus on the financial goal most have of funding retirement. Maybe you envision the financial freedom to just sit on the beach reading a book or enjoy more time boating. Whatever your retirement dream, creating a fiduciary financial plan that puts your personal goals first is essential.
There are three steps needed to create a financial plan. First, define the planning scope by listing out all the key areas of your finances that need to be addressed to achieve your goals. Then identify gaps in any of those areas. And finally, evaluate ways to fill those gaps efficiently and effectively.
Cover all your bases
Our first priority is to make sure we are covering all our bases in terms of our financial goals. Organizing guru Marie Kondo recommends approaching things by category in the most efficient order, and fiduciary financial planning is no different. The Certified Financial Planner Board of Standards defines seven key financial planning subject areas:
- Financial statement preparation and analysis
- Insurance and risk management
- Employee benefits planning
- Investment planning
- Tax planning
- Retirement planning
- Estate planning
There is a lot to cover here. Creating even a simple financial plan for one of our private wealth clients typically takes us at least 12 hours. So on our 45-minute webinar for retirement plan participants, we focused our planning by combining these areas around retirement planning.
We discussed employee benefits planning in the context of insurance and retirement planning because we’re talking here about employer-provided insurance and retirement plans. And we covered investment and retirement planning together since we reviewed how to structure investments in a retirement portfolio.
Identify your retirement gap
Retirement planning is simultaneously one of the easiest and hardest financial planning subject areas to tackle. It’s one of the easiest in that — at least at the beginning of someone’s career — it’s a long way off. But since it’s a long way off, many people put it on the back burner and don’t get serious about it until they feel like they‘re already behind. This can make planning for the retirement of our dreams harder and much more stressful than it needs to be.
What we want to do is get ahead of the game — so let’s talk about how to make a plan, work the plan and stay on track. On our webinar, we showed one example of a tool you can use to help plan your retirement income. Regardless of the 401(k) provider your company uses, most participant websites have a retirement income estimator.
We prefer tools that automatically frame your retirement account as an income stream instead of an account balance. This saves a few steps and is easier to understand. In the end, this is really all about cash flow. Most of our bills show up every month. So when I’m planning for retirement, I need to understand what my monthly income is going to be so I can match that to my monthly expenses.
The tool we used on the webinar also has other important features, such as adding in Social Security, future savings and the company match. This lets you see how all these things come together to give you a single monthly income projection, and show how big the gap is toward achieving your retirement income goal on a percentage basis.
Closing your retirement gap
There are several things you can do to fill a retirement income gap, such as:
- Work longer. You can delay retirement and work longer, if it’s realistic to do so. This enables you to earn delayed Social Security credits and give your portfolio more time to grow.
- Save more. Simply putting away more money obviously helps close your retirement gap, but you need to have the free cash flow to do so. Cash flow is a topic we covered in detail on our financial plan implementation webinar.
- Invest more aggressively. Trying to earn a higher return by investing more aggressively is an option, but typically means you’re taking on more risk.
- Spend less in retirement. Planning to spend less in retirement can help improve your retirement math, but this may require quality of life compromises.
In the example on the webinar, we used the scenario planning tool to make adjustments in the first two areas to close our retirement gap. We planned to work longer and changed our retirement age to 67. And we increased our savings rate from five to nine percent. These two plan adjustments caused our projected income replacement to increase from 78 to 105 percent of our goal. So we managed to close our gap entirely without taking on more investment risk or reducing our retirement spending. There are multiple combinations that can accomplish your income goal. You just have to design the financial plan that works for you — and that you can stick with.
Investing more conservatively
During our webinar, we also explored the option of less aggressive investment planning by adjusting the investment mix slider. We removed a lot of the investment risk by reducing stock exposure from 60 percent to zero. We kept our retirement age at 67 and savings rate at about nine percent. Our retirement income dropped from 105 to 93 percent — back below our goal. So even though this portfolio is less volatile and might feel better in the short run, it lacks the return potential needed to achieve our retirement income goal.
Investment planning can be complicated. But the bottom line is that we need to make sure the investment portfolio is appropriate for the goal. The portfolio should have an investment mix with the potential to drive the return required to accomplish the goal without taking more risk than necessary. Investors should be wary of being too conservative early on or too aggressive as they near retirement.
For retirement plan participants, we often recommend target-date funds because they automatically de-risk over time. They also have a preset glide path that helps to eliminate emotion from investment planning.
Creating a financial plan can be daunting, but it doesn’t have to be. Whether you’re a do-it-yourselfer, working with a financial advisor or somewhere in between — we’re happy to point you in the right direction and suggest the easiest next steps.
For starters, we highly recommend that you watch our financial plan creation webinar and consider completing the exercises.
Also, a very basic version of the tool we use with our private wealth clients is available to explore financial planning scenarios. Just enter your basic information and select retirement as your goal to explore three of the four scenarios above — working longer, saving more and spending less in retirement. You can also continue on to request a quick consultation to learn more about potential options. Or simply contact us now.