Financial Independence Is The New Retirement
The concept of retirement continues to evolve over time. When I begin working with a client on their retirement planning, I like to discuss it in terms of ‘financial independence;’ the point at which you no longer need to work to afford your desired lifestyle. This can be a difficult calculation since you must factor expected rates of return, market volatility, inflation, healthcare costs and the impact of taxes in conjunction with your budget. Coupled with the fact that the average life expectancy has significantly increased over the past 100 years which means we need to prepare for a longer period of time to draw from retirement savings. Suffice it to say, there is no one size fits all for retirement plans.
The first step in mapping out your financial independence is to define a realistic budget and include basic necessities as well as unforeseen expenses like healthcare and extended care. Once a detailed budget is solidified, we use our financial planning software to gather all the data in one location that enables us to start making projections. The software also benchmarks mortality but allows flexibility to account for health factors and family history. A cash flow chart is developed and starts to show where clients are taking money from each year. I like to break the cash flow down into three buckets: Essentials, Discretionary, and Legacy. Ideally there will be lifetime income sources such as Social Security, pensions or annuities to cover the majority of essential expenses like housing, food, insurance, etc. Then we review other resources to cover discretionary spending like vacations or hobbies. Finally, we identify any assets to be left as a legacy to heirs or charities. Once we have mapped out the cash flow then we review the plan for tax efficiency.
Often when we talk about risk people associate that with stock market volatility. All our plans are built to test for bad timing when it comes to our projections. One of the worst things that can happen to your plan is to retire right before or during a major recession if you need to draw on a portfolio when the stock market is down significantly. The software projects over 1,000 different scenarios based on different situations known as Monte Carlo Simulations. These are used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables. It is a technique used to understand the impact of risk and uncertainty in forecasting models that can help us plan for the ‘what ifs’ and give parameters for success. These simulations give us information to then strategize any adjustments that need to be made to fall within the confidence zone of the plan.
As the economy and world continues to change at breakneck speed, it is common for trepidation to creep in when it comes to retirement planning. At Mainspring, we are fortunate to have a robust team with extensive experience in the financial industry as well as some of the industry’s leading software to keep up to date with the fast-moving world that we live in today. The software can tell us one story, but it is up to us to create a customized plan together with each client and stick to it while adjusting over time for any major life changes. Also, we find it vitally important to collaborate with other professionals in our clients’ lives such as accountants, insurance agents and estate planning attorneys to make sure that the plans we build out are executed on successfully.
No matter what your retirement looks like to you, we are here to help you define your financial independence, so you can live a life of fulfillment.
Any opinions are those of Devin Loughlin CFP®, ChFC®, RICP® and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.