We know that your financial plan and your adviser’s work on it go much further than simply managing investment accounts, determining the appropriate allocation based on your goals and risk profile and then recommending the actual investments to fill the allocations. In order to create a meaningful financial plan for you and to have a reasonable confidence that the advice will work, the advice and planning need to address not just your assets and goals but the cash inflows to your financial plan.
At the simplest level, most plans include some form of savings you make from your employment while building assets for retirement (as well as other goals). In addition there will be one or more inflows anticipated for your retirement such as the most basic – Social Security. Why do we show these normal, more or less taken for granted items in your plan?
First, however small the amount, these flows affect what you will have available to meet your goals, whether now or in the future. Rational confidence in the testing of the plan and its parts, together with the ability to reduce the burden on your investment portfolio (avoiding subjecting you to undue risk or sacrifice), requires that we factor in these cash flows.
Second, we understand that you typically want to see these cash flows represented. Seeing the flows will support your confidence in the plan and your adviser, reassure us all that a cash flow has not been overlooked, and allows us to double check the numbers and timing for accuracy.
Third, having these amounts to work with also allows you to work with your adviser to examine various scenarios which compare the effect of different inflows on your plan and permit you to make a better informed choice among options where they exist. This would involve, for example, a comparison of an annual versus lump sum pension payment or of the selection of various approaches to the timing of Social Security benefits.
Going deeper into your financial situation and planning for it, these cash flows provide a better picture of your finances and expectations. Some clients have sufficient pensions, annuities, or other cash flows coming in such that they never will have to draw down on their assets. Other clients have so little coming in that the plan necessarily focuses on what the investment portfolio can be expected to provide towards their goals. Most clients’ circumstances lie somewhere in between.
Both at the beginning of your relationship with your adviser and on an ongoing basis as the plan is updated, you will need to verify with the adviser what cash flows are involved in the plan at each point in time. The type of flow, the amount, its tax treatment, expected duration and potential growth or decrease should be first ascertained and then, over time, verified. Verification is very important to you and your adviser having rational confidence in the plan because real life cash flows may not match up to what is anticipated and written into your plan.
For example, some clients may overestimate the amount they plan to save each year or events may lead them to cut back on savings. A company pension plan might fail and the PBGC may not pay nearly as much as you were promised. An unexpected windfall naturally changes the results of a plan and provides a positive planning opportunity. A change in tax treatment might “go either way” and generate a greater cash flow or lower deductions than expected. In all cases, the plan inputs should be corrected to reflect the change and your goals adjusted to meet your changing circumstances as well as to maintain rational confidence in the plan results.
What does all of this discussion really tell us? It is important to be clear with your financial adviser as to what you expect your cash flows to be now and in the future. These flows are central to the success of your planning and its accuracy in real terms. If we don’t use the actual cash flows, then the resulting inaccurate planning might mean that you will be tempted to spend too little or too much and adversely affect your lifestyle.
George Chamberlin & Mentor RIA Consulting © 2015-2018