By Stephen Blakely, Next Avenue Contributor
During my working years, I paid for three independent financial planning sessions — the last after the 2008 financial collapse, to assess the damage. But only when my employer of 20 years wiped out my job in a budget cut in 2017 did I experience the retirement financial planning process and learn how it’s very different.
Understanding the difference between financial planning and retirement planning can be critical to developing a retirement income strategy.
Financial Planning Vs. Retirement Planning
A financial plan is designed to focus on the accumulation phase of the work-life cycle, to make sure you have a general, but realistic, target of how much you’ll need after work stops. It also helps ensure that you’re saving and investing enough to hit that target when you do retire.
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By comparison, a retirement financial plan is designed to focus in detail on expenses after the paycheck stops and how your various assets can generate an income stream that will cover those costs for the rest of your life.
“It’s the difference between people at work versus money at work,” says Fran Toler, principal of the Toler Financial Group, in Silver Spring, Md., and a Master of Science in Financial Services. “Retirement income financial planning is much more detailed and it’s a different experience. It’s when you’re ready to retire that the detail becomes really relevant.”
“A retirement plan is different in how it focuses on specific aspects of retirement,” adds Gay Truscott, a Certified Financial Planner with Edgemoor Investment Advisers in Bethesda, Md. “It requires a much more granular examination of both your income and your expenses. Both sides of the ledger are equally important.”
Will My Money Last?
Since I was 67 when my salary ended, the question “Will my money last?” became painfully real, even though I had saved fairly aggressively over the years.
And since I’m a financial pessimist at heart, I went through the complex retirement planning process twice with two planners (Toler and Truscott) to get separate professional analyses of my situation and make sure I understood their conclusions. At my age, even with my wife still working, I can’t afford to get this wrong.
For anyone worried about being able to afford to retire, conducting such a detailed retirement financial plan can be extremely valuable. You’ll protect yourself against a financial catastrophe as you get older and you’ll see how much you can spend on the things you want to do (for me, that’s traveling, sailing and writing).
How Retirement Planning Software Works
Retirement financial planning is part of a licensed adviser’s formal training, although some pros focus on it more than others. The key element is deep and comprehensive data harvesting: pulling together all possible information about your assets (savings, investments, income) and expenses (typically divided between essential and discretionary). This requires a lot of work on your part, but it’s essential.
Next, your information is fed into a computer program that runs what are known as “Monte Carlo projections” to determine the likelihood of your having enough money to last your lifetime based on your intended retirement date. These projections incorporate a huge range of known and estimated variables including inflation and investment return risk.
The program typically links directly to your bank and investment accounts to get real-time financial data. The result identifies the big expense items that will affect your future financial security, the assets you have that can pay for them and how long your money is likely to last under both good and bad scenarios.
Big financial firms tend to have their own proprietary planning software, but for smaller or independent advisers the “big three” are MoneyGuidePro, eMoney and NaviPlan, according to Truscott. Advisers must pay expensive licensing fees to use this kind of software and take training and continuing education courses to remain current with the programs.
What the Programs Let You Do
The programs let clients access their results online after the data gathering ends. They can then update and change factors and tinker with “what if” scenarios on their own.
“I’d say about 50% of our clients use it themselves, and I wish it were higher,” says Truscott. “A lot of people will gather the data, but age, fear of technology and complexity will keep them from using it.”
Toler notes that “planning software has improved in recent years, not just technically, but on a deep conceptual basis of how to present it understandably.”
One approach is to show a potential retirement portfolio as “buckets of money,” to better convey the various types of investments a person has and then offering withdrawal strategies accordingly. “It’s very complex, and the challenge of conveying the information is difficult,” she says. “About one in five just don’t get it.”
What My Retirement Plans Revealed
In my case, both retirement plans came to the same conclusion: I can afford to retire, if I don’t do something really stupid. And both showed remarkably similar probabilities of success of making my money last.
Toler used eMoney, which seemed to me more comprehensive but harder to use. Truscott worked with MoneyGuidePro, which seemed more intuitive; it presented results as a dashboard, rather than a spreadsheet.
If you use a fee-only adviser, expect to pay around $1,500 to $2,000 for a retirement plan. If you’re a client of medium-sized or large brokerage firm, it may include the service as part of your investment fee.
I found both plans and the advisers who ran them to be excellent and well worth the cost and effort. As I start retirement, I now have a baseline I can trust to guide my annual financial reviews. The retirement plans have already helped my wife and me make a big financial decision: to postpone the purchase of a second home.
For me, having a retirement plan is making retirement a lot more fun with a lot less worry.