Recent financial markets have certainly been a roller coaster ride for investors, with the S&P 500 falling 30% in 22 trading days in March, subsequently having its best month since 1987 in April. Historically, these violent market swings have created a lot of uncertainty and anxiety for investors, particularly for those investors operating without a well thought-out, long-term financial plan. Citizen’s Financial Group notes that while investors with an established plan report a higher level of confidence (87%) and overall positive outlook for their financial security (75%), only 55% of investors have a plan in place commonly citing fear as their biggest barrier. When advising clients for the long term, initial and on-going financial planning and analysis is a critical component of our service model, particularly during volatile markets. In this article, we explore what is a financial plan, how we construct a financial plan with clients, and how we utilize that plan to advise clients.
When developing an initial financial plan for clients, our process consists of a thorough review of their personal balance sheet. This includes an accounting for all of their assets including brokerage and retirement investments, cash holdings, business interests, real estate, life insurance, and any debts such as mortgages and other liabilities. In addition, we review their monthly cash flow for current monthly spending and savings, as well as desired future spending in retirement and other key long-term financial goals (i.e. inheritance to children, charitable donations, etc.).
This initial balance sheet and cash flow assessment is utilized to make forward projections of a client’s financial future under various scenarios (i.e. future investment rates of return, retirement ages, spending levels, etc.) with a focus on desired future spending levels. Spending as a percentage of a client’s investment portfolio is a key barometer when assessing the likelihood of the lifetime longevity of a client’s assets. Industry studies note a 4% withdrawal rate as having a high probability of being sustainable for the duration of one’s lifetime.
Per J.P. Morgan data, the average household spending rate for 65-74 year-old individuals is $68K and declines to $54K for individuals over 75 years old with the decline in spending attributed to lower transportation, entertainment, and shopping expenses later in life.Using a spending amount of $68K, along with the average 2020 Social Security benefit of $18K per Social Security Administration, we illustrate the 4% spending principle below at various portfolio sizes. (For more information on Social Security, please reference my colleague Victoria Roger’s article, "I Want Mine, but When? Social Security Claiming").
As you can see, a reasonable spending level, including Social Security for an investment portfolio ranging from $1M to $3M using the 4% withdrawal rate, implies a spending range of $58k to $138K.
Investment Portfolio Balance
Income from Portfolio (4% withdrawal rate)
Average Social Security Income (2020)
Gross Annual Income
For the reader, we kept the planning variables very simple. In practice, we factor in other financial variables such as cost-of-living inflation, portfolio turnover and associated tax costs, taxation and timing of withdrawals from brokerage and tax-deferred accounts, respectively, and other unique client financial variables.
As one can appreciate, a financial plan developed as noted above quickly becomes customized to that client’s unique financial circumstances and is a key resource when advising clients. As a simple example of how we utilize a financial plan to advise clients, let’s assume we are working with John and Jane Doe and the following financial assets, desired spending, and retirement goals:
Current aggregate investment balance of $500K
Spend $70K per year in retirement with expected future Social Security benefit of $25K at age 66
Both want to work another 5 years and retire at age 66
In constructing John and Jane’s financial plan, we assessed their current balance sheet and monthly cash flow, and most importantly projected forward their financial picture under conservative investment return, taxation, and spending assumptions. During the projection process, we mutually agreed to the following key financial decisions:
Monthly savings over the next 5 years until retirement
Construction of an investment portfolio that has a high probability of achieving their long-term financial goals, while ensuring an asset allocation that they can “stomach” during periods of high uncertainty and volatility
Maximum tax efficiency, evaluating when to claim Social Security, when to begin distributions from tax deferred accounts, and if there may be future opportunities for a Roth IRA conversion
After deciding on these initial key financial decisions, we periodically re-evaluate John and Jane’s financial variables as their financial plan unfolds for any potential adjustments to the plan.
Capital markets are likely to continue to be volatile as the Coronavirus and its associated financial impact unfolds. However, as we have illustrated in our experience working with clients, a detailed financial plan should serve as the roadmap to achieving one’s long-term financial goals without veering off track due to any near-term market volatility.
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.