Retirement planning: A case study

By Douglas Lamb | February 4, 2013 | Last updated on February 4, 2013
5 min read

Although the idea of financial planning is now well accepted, planners still face a number of hurdles.

To begin with, few people actually have plans, but even many of those who do have a plan don’t understand and connect it to their everyday life. This is particularly evident when it comes to retirement planning.

Much of this can be chalked up to either misinformation or too many differing viewpoints. For example, some sources advise that a person needs to be able to cover a certain percentage of his or her pre-retirement expenses to make it through in one piece. Others say a specific sum of money is required to feel secure. But this type of non-personalized, broad-brush approach just isn’t helpful. Instead, we need to look at retirement planning, and how we can make the process more personalized and understandable to clients, so they start to engage in and connect with the process.

To that end, the following questions are the basis of the retirement planning discussion.

Can I retire?

All plans want to answer yes to this. Financial plans include client-controlled inputs (reflected in their budgets, spending plans, any part-time work they might perform in retirement, etc.), along with conservative assumptions (market returns, inflation, etc.) to develop an acceptable plan.

When can I retire?

The age clients can retire at should be a major focus of a retirement plan. This is an assumption that can be varied to determine an acceptable plan. It might well include retiring and working part-time for a few years.

What lifestyle can I support?

The reality is there are several stages of retirement, all with their own unique expense makeup. So a better question to ask is, “What lifestyles can I support?”

Clients want to know what they can afford to do in an active stage without compromising their financial security in later stages, when they might experience significant health costs.

And make no mistake: These health costs need to be budgeted for. This is perhaps more important than the retirement age question, as it lets clients see how they’ll live and survive, and it connects them to their plan.

I recently heard an expert on the radio suggesting retirees minimize their expenditures in the early stages of retirement so they won’t run out of money later on. I don’t think this is very helpful. People work hard for many years and deserve to enjoy their retirement to the fullest and spend as much money as they can justify on travel, entertainment and other discretionary items while they have the health to enjoy them.

How long will my money last?

This is the bottom line and the acid test. With all the conservative inputs and assumptions, monies should last clients into their late nineties.

Plan variables

Budgets and projected expenses change when planning for the four very different and distinct stages of retirement.

For clarification, these stages include: An active stage, which could be characterized by high levels of travel (see lines 51 to 53 in the “Post-retirement worksheet,”), recreation and sport activities; entertainment ; and other activity-based discretionary expenses. When these expenses are laid out for a client, he or she is better able to plan or budget for specific expenses, and can more easily identify with and really see what his or her retirement lifestyle will be like.

A less active stage, which includes lower levels of activity-based expenses, less travelling, less entertaining, etc.

A downsizing and assisted-living/seniors accommodation stage, in which the client will see a further reduction in activity-based expenses, perhaps a moving from two cars to one or starting to use taxis more, the beginning of additional health-related costs, the selling of a primary residence and/or renting of a residential unit.

Note in lines 14 to 29, you can see the reduction in home-ownership expenses and the start of a rental charge. To make it real and acceptable for clients, an advisor would ask (in this case) if $2,500 per month in today’s dollars would be sufficient for a rental unit when they downsize. If it isn’t, then the number can be adjusted accordingly.

The nursing home stage, which includes the potential elimination of all activity-based expenses, taxis as the sole means of transportation, nursing home facility costs and significant additional medical and attendant healthcare costs.

In this case study, let’s say the client has asked that in addition to nursing home (rental) facility costs of $2,500 per month (line 14) and $12,800 per month for food, toiletries and sundry (line 2), another $2,500 a month (line 40) be applied for additional health and attendant medical care.

A plan that addresses all these stages, and all of the variables a person is likely to encounter within these various stages, is what clients want. It’s something to identify and connect with. Essentially, clients want a detailed plan that allows them to travel, entertain and enjoy themselves when they have the health to do so, and contains sufficient financial resources to look after their long-term health needs later in life.

A final note: For this to be effective, the planning should be done in today’s dollars and inflation rates, as these are what clients readily understand. Otherwise, it’s hard to determine what costs to use if a client looks like they’ll be facing the prospect of renting a housing unit in 15 years’ time, or will be dealing with long-term medical expenses.

Will my money last?

In the pre-retirement years, the net worth (marketable investments, home equity, cottage equity and business investments) of our case study clients increases. (See also “Post-retirement worksheet.”)

On retirement (age 65 here), the marketable investments are transitionally reduced to finance the retirement lifestyles. This is what their registered and non-registered investments are for.

The graph also reflects the sales of their business and cottage investments, with the proceeds used to augment their marketable investments.

This is also true when the client downsizes and the proceeds from their home become available. Now they’re left only with marketable securities.

According to this case study, the clients run out of money at age 98, so here we have an acceptable plan.

Douglas Lamb