You can’t open a financial app or read an article on retirement these days without seeing an ad for a financial plan. You enter some very basic financial data, click submit and see a result that tells you if you can retire or not. But is a DIY or “robo” financial plan worthwhile? Deciding if and when you can retire, proactively considering all of your future needs, adding in a multitude of variables such as health care, taxes, inflation, rates of return on asset classes and the potential need for long-term care – these are not decisions you want to leave to chance.
An experienced, knowledgeable financial advisor will not jump straight into building you a financial plan. You probably would not trust a doctor who immediately jumped to a diagnosis without first asking about your medical history and perhaps ordering some tests. Likewise, a reputable advisor will first take you through a detailed discovery process. In the DIY world, this step consists entirely of financial data gathering. When you deal with a professional, they will also ask you about your values, goals, desires, and dreams. In other words, what’s important to you about money? Not just in terms of what you have, but what you would like it to do for you and your family?
When the discovery process is complete, the financial analysis can begin, but there are still many moving parts to think about before an advisor can build a plan. One of the most important is knowing the intricacies and special circumstances of your specific retirement plan. Many companies offer retiring employees a myriad of choices, including pension plan distribution options, health care continuation, and company stock eligible for net unrealized appreciation (NUA) tax treatment. Each of these should be considered during discovery. Every family is different and has changing needs over time. There is no one size fits all for financial plans.
Once the financial analysis is complete, the advisor begins to build a comprehensive, customized financial plan based on your needs and circumstances. Financial planning software ties together all the financial calculations behind the scenes. Some unknown variables like future inflation rates, rates of return for asset classes, sequence of returns after retirement and how long you might live all have a tremendous impact on the outcome of the plan. The advisor’s job is to use sound research from a variety of sources for things like projected rates of return for asset classes.
When it comes to estimates like life expectancies, it’s prudent to be optimistic but realistic. You don’t want to create an analysis that offers positive results through age 85, only to live to 95 and not have the resources you need. This stage of the process combines your goals, income and asset resources into a scenario that serves as a starting point for your plan. It is at this stage that the real value of a knowledgeable professional is evident.
DIY scenarios based on your current situation assume you will make no qualitative changes to capitalize on the strengths and minimize the weaknesses of your retirement case. Simple decisions like when to start Social Security, when to take distributions from a retirement plan, which pension selection to make, and whether to roll over company stock or make a net unrealized appreciation distribution can have significant impact on your ability to successfully attain your goals during a lengthy retirement. You should review and discuss each of these scenarios that apply to you with your advisor. The financial modeling will offer probabilities of success based on various calculations for rates of return and sequence of return. No one knows exactly how things will transpire over the next 30 years, so you should consider many possibilities and determine your rate of success over many different outcomes.
All the discovery, analysis, and modeling are really just the beginning of the process. People’s lives change. Personal and financial circumstances are different than what we expected over time. A good financial plan, implemented and monitored by a knowledgeable financial advisor, will grow and change with you over the years. The experience of the financial advisors at Baird Retirement Management can help you navigate this process successfully.
"Robert W. Baird & Co. Incorporated does not offer tax or legal advice."