Developing a suitable financial plan – Business Journal Daily

By Jonathan Lapine, CPA, CFP®
W3 Wealth Management

WARREN, Ohio — For nearly two decades now, individuals have expected developing and maintaining a financial plan to be included in the list of services offered by a financial advisor. As certified financial planners, W3’s founders were early adopters, using technologies in the 1990s (eg, Monte Carlo simulations) that are now commonplace. Several websites have begun offering financial plans directly to individuals for purchase and through 401(k) platforms.

As technologies have become easily replicable, our experience working with clients and their financial plans in practice taught us the importance of ensuring that the assumptions in a financial plan reflect reality. A plan with even subtly poor assumptions could give a false sense of confidence or cause someone to live an overly conservative life when there were more possibilities. Here are some of the most common financial plan assumptions that contribute the most:

Retirement Expenses/Expenses: Naturally, the most crucial information also tends to be the most elusive. Understanding what one might spend in retirement is riddled with nuances and uncertainties, but doing the work to understand what that number is might be the most important thing you can do before making the decision to your retirement. If you miss the target by even $500 per month, that means your retirement plan could be cut by $6,000 per year, inflated by 2.5-3% per year for 20-30 years. The overall impact can be quite significant, so it would behoove a future retiree to sit down and consider their expenses and how they might change throughout retirement. More often than not, sitting down with a spreadsheet of possible expenses and estimating your own, or using secure aggregation software that automatically feeds and tracks expenses over multiple months are popular tactics for tracking this number.

Inflation: A big final word, an assumed inflation rate can also seem quite subtle but have a drastic impact on the outcome of a financial plan. Using a high rate due to biased 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 can cause you to lose purchasing power throughout retirement. Historical inflation data has continued to average between 2.5% and 3% since the 1920s. Remember that good financial plans should be reviewed regularly throughout retirement to ensure that assumptions like this remain up to date as new data emerges.

Temporary horizon: As I like to tell our clients, everything would be easy if they could just provide their dates of death. Every financial plan needs an endpoint, so without this knowledge there are certain factors to weigh when determining the right endpoint, or “time horizon” for your plan. Factors to consider include known medical conditions, longevity in the family, and existence of lifetime pension/income streams, among others. Running a plan for a few more years could fundamentally change some financial plans that rely more on invested assets to meet income needs.

Even if you carefully consider these factors on your own, there are many benefits to using financial planning professionals like CFPs. CFPs are trained to discuss these and other factors with their clients and know how to ask questions and get an accurate answer. Hiring a professional can help ensure that the path you follow is the right balance between enjoying the fruits of your labor and a confident financial future.

The Certified Financial Planner Board of Standards, Inc. (CFP Board) is the owner of the CFP® Certification Mark, the CERTIFIED FINANCIAL PLANNER™ Certification Mark, and the CFP® Certification Mark Logo (with plaque) in the United States. States, whose use it authorizes. by individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

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