Advisors correct pivotal error in financial planning

Advisors correct pivotal error in financial planning

Advisors correct pivotal error in financial planning New data suggests that although people around the world are living longer, most of us are spending more of that time dealing with illness and disability. As a result, financial advisors need to be extremely cautious about the financial planning projections used with clients.
Use the wrong ones and your clients run out of money prior to death, a situation nobody wants to face.
Assante Financial Management advisor Glen Rankin has a simple solution that will better ensure clients are able to take care of their ongoing living expenses while also providing their loved ones with an inheritance or legacy.
“Life expectancy is what people tend to look at. Half the people are going to live shorter than that and half are going to live longer than that. You can’t deal with life expectancy at birth. You have to look at the life expectancy at retirement date,” says Rankin. “If you look at that you’re going to get a much longer number than if you’re looking at life expectancy at birth.”
The average person who’s 65 today has a life expectancy of 16 years if you’re a man and 20 years if you’re a woman. That doesn’t mean an advisor should plan for a 20-year retirement because there’s a 50% chance that your 65-year-old client is going to live longer than that.
“Why would we plan for a probability of 50% that we’re going to be alright?” asks Rankin. “So, we want to make sure that we’re using a date at which there’s a 90% chance you’re not going to need any more money.”
Planning horizons, not life expectancy, is the best way to ensure clients don’t run out of money says Rankin.
“When you look at planning horizons if you’ve got a 65-year-old man it moves that number to about 91 and also moves that number for a woman to about 95,” Rankin says. “If you create a plan with these numbers in mind than you’re going to be about 90% sure, assuming your other variables are correct, that they’re going to be alright.”
The net effect of using planning horizons instead of life expectancy is that you accommodate approximately 10 years of additional expenses for clients ensuring their quality of life at a time when they most need it.
“If you’re wrong [using planning horizons] than they have too much money,” says Rankin. “Whereas using life expectancy and you’re wrong they run out of money.”
  • Kathy Waite Your Net Worth Manager 2015-09-02 3:23:38 PM
    I use Naviplan and it defaults to 90 , select Monte Carlo simulation and it tries different ages as well. I usually try to leave the house out of the plan so that if they overspend or have long term care needs we have that. I am seeing people assume they can downsize and bank a lot of cash but in our area condos cost as much as houses and have the condo fees as well. The current 55 plus all assume extendacare is covered by the government and the kids will inherit the house. It may be mostly now , just pensions taken into account but in Europe they sell your home , farm and take savings so the 40 years olds shouldn't assume that won't happen here as the number of people over 55 grows and we spend longer, less quick deaths, in these homes.
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  • Lynda Weinrib 2015-09-06 11:23:43 AM
    My father helped me to invest at age 15 - yes, almost 60 years ago. I have experienced the highs, the lows, and the level markets.

    I believe that most people will live for about 30 years after retirement. Given that assumption, a retiree should invest for the "long term", as should a 40 year old.

    That being the case, why do we err on the side of caution when we know that the money invested in that manner will not grow as fast as inflation plus taxes plus withdrawals?

    I did not - and still do not. And it has proven to be the right way for me. I still invest enough in conservative equities to sleep nights and enough in highly volatile equities to make my money grow more than inflation, taxes and withdrawals over the long term.

    I choose my money managers very carefully, and watch them very carefully to ensure that they do not switch their investment styles. I am very aware that my expertise is definitely not choosing stocks or bonds!
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