The Wealth Management Process – Refining

Published On: February 6, 2024

Written by: Ben Atwater and Matt Malick

Most new clients come to us due to a major life event like a job change, imminent retirement, the death of a loved one, a divorce, the sale of a business or a property, etc. These events trigger a desire to plan your financial future.

The planning process is never ending and always changing. A plan is something we are always adapting and updating.

You need to start somewhere though, so this essay will dive further into our planning process.

This is the fourth and the final essay in our wealth management series. In the first, we focused on getting to know our clients​ and understanding their goals.  In the second, we examined the money side of wealth management, namely looking at retirement assets and your retirement income sources. For the third, we analyzed how your goals and your money intersect to create the best likelihood of retirement success.

In this last installment, we will delve into variables in a financial plan to better understand what drives success. It is not simply savings, spending, asset allocation and investment returns, there are other more controllable factors that can help us plan better.

In the client example we are working from, the client has a 70% stock and 30% bond target allocation and has an 82% probability of success to meet their retirement spending goals, which is in the confidence zone of Money Guide, our Wealth Management software. Let us start by seeing what it would take to get them to 90% and then work backward from there.

Our clients, husband and wife, plan to retire at age 63, but to get from 82% to 90%, they need to each work an extra year with the commensurate annual savings they plan. The extra year of work not only leads to more savings, but also means one less year of retirement expenses.

The clients also need to decrease their overall lifetime retirement spending by about 9%.

And the clients should plan to wait until age 70 to maximize their Social Security benefits, which was part of the original assumptions, but still, something important we wanted to explicitly mention. Social Security is a critical component even for mass affluent households. The higher a client’s overall net worth, however, the less important Social Security is to their retirement planning, all other things being equal.

Money Guide assumes our clients will live until 94 for the wife and 92 for the husband. Since these clients are retiring a little younger than most, at 63, the client’s probability of success increases slightly with a more aggressive allocation, topping out at 83% for a 100% stock allocation.

Another reason for the slight increase is because these clients expect a liquidity event equal to about 15% of their net worth in ten years, which means they will have money to dollar-cost-average into a 100% stock portfolio down the road.

For most clients we see, their probability of success usually peaks with some level of bond exposure, which works to reduce a portfolio’s volatility, which is especially important when you are only withdrawing from a portfolio, and not adding to it.

Money Guide encourages us to separate client goals into categories or buckets – needs, wants and wishes. This allows us to isolate different probabilities for a hierarchy of goals. For example, your needs bucket might include your general monthly expenses, your healthcare and a cushion amount for unanticipated emergencies. Your needs bucket probability of success might be 99%.

Then, we can look at your wants like an annual travel budget, a meaningful one-time home renovation and your dream sports car for retirement. In this case, your needs / wants bucket might drop your probability to 90%.

Under your wishes bucket, you may add paying for college for your grandchildren, which might drop your probability to 80%.

These buckets can provide more clarity on your goals. Additionally, if things do not go as planned, for a variety of reasons, in retirement, you know where you can reduce and still provide yourself with a comfortable retirement.

We hope you have enjoyed this wealth management series. These articles only scratch the surface. Everyone’s situation is unique, and we enjoy collaborating with clients on a multitude of scenarios.

Our next series is going to address the estate planning process, a particularly timely issue as the federal estate tax exemption is set to decrease at the end of 2025, less than two years from now. Stayed tuned.