Developing a Financial Plan that Fits

By Jonathan Lapine, CPA, CFP®
W3 Wealth Management

WARREN, Ohio – For close to two decades now, individuals have come to expect that developing and maintaining a Financial Plan would be included in a Financial Advisor’s list of services offered.  As Certified Financial Planners W3’s founders were among the early adopters, utilizing technologies in the 1990s (e.g., Monte Carlo Simulations) that are now commonplace.  Several websites have begun offering financial plans directly to individuals for purchase and through 401(k) platforms. 

While the technologies have become easily replicated, our experience working with clients and their Financial Plans in practice has taught us the importance of ensuring assumptions in a financial plan reflect reality. A plan with even subtly poor assumptions could provide a false sense of confidence or cause one to live an overly conservative life when more possibilities existed. Here are some of the most common Financial Plan assumptions that are the largest contributors: 

Retirement Spending/Expenses:  Naturally, the most crucial bit of information also tends to be the most elusive.  Understanding what one might spend in retirement is riddled with nuance and uncertainty but doing the work to understand what that number is might be the most important thing you can do before making the decision to retire. Missing the mark by even a mere $500 a month means that your retirement plan could be off by $6,000 a year, inflated by 2.5-3% a year for 20-30 years. The aggregate impact can be quite meaningful, so it would behoove a soon-to-be retiree to sit down and review their spending and how it might change throughout retirement. Most commonly, sitting down with a worksheet of possible expenses and estimating yours, or using a secure aggregation software that automatically feeds and trends expenses over several months are popular tactics to tracking this number down.

Inflation:  A dirty word of late, a presumed inflation rate can also seem quite subtle yet drastically impact the results of a Financial Plan.  Using an elevated rate due to biasing recent events could mean sacrificing your lifestyle to protect against an unlikely 20+ year period of persistently high inflation.  On the other hand, using a low rate to compensate for a weaker plan may set you up to lose purchasing power throughout retirement.  Historical inflation data continues to average between 2.5% and 3% dating back to the 1920s.  Remember, good Financial Plans should be revisited regularly throughout one’s retirement to ensure assumptions like this stay current as new data emerges.

Time Horizon:  As I like to tell our clients, this would all be easy if they could simply provide their dates of death.  Every financial plan needs an endpoint, so without this knowledge one must weigh certain factors when determining the right endpoint, or “time horizon” for your plan.  Factors to consider include known medical issues, longevity in the family, and the existence of pension/income streams tied to one’s life, among others.  Running a plan out an extra couple of years could fundamentally change some financial plans more dependent on invested assets to meet income needs. 

Even when considering these factors carefully on your own, utilizing Financial Planning professionals like CFPs can add a lot of benefit.  CFPs are trained to discuss these factors and many others with their clients and know how to ask questions and get an accurate answer.  Engaging a professional can help ensure the course you chart is the right balance between enjoying the fruits of your labor and a confident financial future.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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