Are you saving enough to retire? A financial goals plan makes that decision easier
We run a lot of scenarios through our financial goals software for clients. The resulting report is often called a retirement projection and that’s a common use. It answers the question: “Are we saving enough to retire in a specific year assuming we keep spending money as we do now?”
But clients always have more questions. For example, for one client we tested if we have enough saved up to retire in two years and spend at the same rate we’re spending now. The answer was yes.
Do we have enough to retire this year? Again, yes. They do not have long-term care insurance, so we tested if we have enough for one spouse to enter the nursing home for eight years while the other remained in the house — a double-whammy on the pocketbook. The answer was we’re close, but we don’t have enough. Is there enough for a three-year nursing home stay, which is the average, while the healthier spouse stays in the home? Yes.
Do we have enough to retire in two years if inflation stays at 3.5% long-term instead of 2.25%? Yes. The software we use projects a future long-term rate of return based on the investments we hold in the portfolio. We asked even if we have investment returns that are 2% per year lower than expected, will we have enough? Yes.
Financial goals software do not give you a yes-or-no answer. Most use a process that yields a probability of success percentage. Based on your age you’ll want a percentage that’s sufficiently high: say 75%. But if you’re older and have less time to make adjustments in your plan, you’ll want a percentage that’s higher, perhaps 85%.
For another client, we tested to see what would likely happen if we sold the house, paid a lump-sum to move to a senior living facility and paid monthly rent thereafter for food and amenities. We couldn’t afford the high-end large apartment there, but the slightly more modest one was doable if we trimmed the planned expenses while living there.
In a recent projection we tested the average nursing home stay assuming we’d sell the house and drop some home expenses. Since the client is not able to buy long-term care insurance, we tested if we could afford a worst-case scenario of 10 years in the nursing home. We could afford nine years, not 10. We tested if we could afford five years in a memory care facility, which is more expensive than a nursing home. The answer was no but almost. We tested if we would benefit from converting IRA funds to a Roth. Yes. We check for a tax advantage from Roth conversions in almost 50% of our plans and take action in some cases.
In an upcoming goals plan, the clients will test if they can drop a life insurance policy that’s coming up for renewal next summer. They are close to retirement and have saved diligently. Both children have scholarships and 529 savings accounts sufficient to pay their remaining college costs. We’re hoping the analysis will show that we no longer need to pay those premiums. If we do still need life insurance coverage, we’ll check how many more years we’ll need it.
In almost all plans we test how higher inflation impacts the plan, how low investment returns would impact the outcome and how living longer than the expectancy tables changes it. The answers differ depending on your circumstances.
Information like this lets you make solid financial decisions. Sometimes you can produce analyses like this on your own with a sophisticated retirement calculator. A friend uses this calculator. As a CPA, I naturally like AICPA’s 360 tools. Both give you data tables so you can check “inside the box.”
Financial planning software such as that sold by Quicken and NewRetirement.com let you create scenarios similar to what we financial planners do with our professional software. Or you can sometimes hire a financial planner for a financial goals project testing the scenarios you need.
Sandi Weaver, CPA, CFP, CFA provides financial planning and investment management through Weaver Financial in Mission, KS. She is a member of the Missouri Society of CPAs. She is a committee member in the Financial Planning Association of Greater Kansas City chapter. She holds the Chartered Financial Analyst designation, the benchmark of professionals in the investment field.
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