Conferma obiettivi

From Planipedia

Thanks to PlanPlus and WEA for sharing their material for this Best Practices Guide.

Contents 1 Retirement Goals – Audit Process 2 Educational Funding Audit Process 3 Other Capital Objectives Audit Process 4 Needs on Death Goals Audit Process 5 Needs on Disability Goals Audit Process 6 Estate Planning Goals Audit Process 7 Conclusion

Retirement Goals – Audit Process

There are two primary goals that a client sets relative to their retirement. First is their target retirement age and second is their after-tax spendable income target. Let’s look at each.

Retirement Age: Discuss with your client their targeted retirement age to see how committed your client is to that target. If their ability to achieve that target age is impossible, given their retirement income objective and their saving capacity, what’s more important to them, the target age or the target income? This is an important distinction so that you can model a strategy that will be in line with how your clients rank the importance of these two issues. By determining this, you’ll know if you should first model a strategy to plan for the client working a few years longer, or perhaps consider accepting a somewhat reduced target income.

Retirement After-Tax Spendable Income: Ask two clients how much after tax spendable income they want in retirement and you will get widely different answers, even though their current incomes might be quite similar. A logical way to determine if your client’s target income is realistic is to review it in light of the client’s current lifestyle. Be sure to recognize any changes they’ll anticipate in retirement. Below is an audit for two clients with the exact same current family income, but with quite different current lifestyles.

This example illustrates why using an audit process can be so valuable.

• Using a standard 70% target, which is commonly done, is not always logical.
• For “Family A” above, their current lifestyle and objectives require only 48% of their current pre tax income to maintain their lifestyle in retirement.
• “Family B” does require 70%.

This is an interesting anomaly because the family that saves more today typically needs less in retirement than the family that saves less. This is because their higher saving pattern will reduce their lifestyle today, thus requiring a less lavish lifestyle in retirement.

Educational Funding Audit Process

Setting goals to fund children’s post secondary education is a very high priority with many clients. Because this is such an emotional and sensitive objective, it’s important to ensure that the goals are realistic and that thorough consideration of all the issues are recognized.

Number of Years to Fund: One of the first issues the client has to consider is how many years of post secondary education do they wish to fund. In most situations parents will set a target that is consistent for all of their children, especially while the children are young. However, as the children mature, this aspect of the objective might need more thought so that it more accurately reflects the goals of each child relative to their career aspirations and their academic potential. A discussion and review of these issues helps the client with more accurate goals.

Amount of Annual Cost to be Funded: How much would it cost for tuition, room and board each year for each child? These costs can vary dramatically from one educational institution to another and for various types of degrees. Thus, some recognition of the potential universities that might be attended and the type of program to be taken should be discussed. Published sources and databases are available to help.

Once an estimate of the cost has been identified, the next question is, “How much of the annual cost do the parents want to fund and how much will they expect the children to assist in funding?” For example, the estimated costs for a given university might be $10,000 per annum, but perhaps the clients wish to fund $7,000 per annum leaving the remaining $3,000 to be funded by the children through part time work or summer employment.

Other Issues Pertaining to Educational Costs: When planning for the future, it’s necessary to make some kind of assumption relative to the rate of inflation. Typically you’ll identify an inflation rate for a client and use that throughout the planning process consistently. However, when it comes to educational funding, past history has indicated that in many jurisdictions these costs tend to increase at a rate that exceeds the inflation rate for other items. Thus consideration should be given to setting the educational funding goals to recognize a rate of inflation that is higher than for the rest of the client’s longer-term goals.

Other Capital Objectives Audit Process

While retirement and education funding are the two most common financial goals that clients have, they certainly aren’t the only ones. Here are some examples of some other life goals:

• Put a new roof on the family home in 5 years for a cost of $15,000 in today’s dollars.
• Renovate the kitchen in 4 years at a cost of $25,000 in today’s dollars.
• Purchase a boat next summer for a cost of $15,000 in today’s dollars.
• Accumulate a down payment of $20,000 for the purchase of a home in 5 years.

Any capital objectives such as these should always be discussed with the client relative to their ranking against each other, and against the long-term retirement and educational funding objectives. Sometimes a client is not able to achieve all of their objectives and it’s important for the advisor to know the priority ranking of all objectives so that when modelling solutions, they can recognize the client’s preferences.

Life Goals Analysis vs. Single Needs Analysis: Another consideration is the methodology used to analyse the client’s situation. There are many tools available that provide the ability to analyse these types of objectives. However, what must be recognized is that when you analyse a client’s individual goals in isolation, it makes the co-ordination of a strategy that much more difficult. For example, you might develop a retirement strategy that is workable and sustainable for the client, but then you might do an analysis for education funding and also develop a strategy that is workable. However, when you combine those two strategies, the financial commitment may be beyond the client’s ability to sustain.

This can be even further compounded when you add in some of the additional short-term capital expenditure goals as described above. Whenever money is used for these short-term goals, there will be an impact on the retirement and educational objectives. Taking a life goals approach that lets you develop a strategy that encompasses all of a client goals in one analysis is preferable over single-need-type analysis methods that don’t provide this powerful aspect.

Needs on Death Goals Audit Process

When planning for the eventuality of death, it’s necessary for the client to identify what they feel would be a reasonable survivor income that will allow the family to maintain a target standard of living. Similar to the exercise described above under the Retirement Planning Audit Process, it’s helpful to do a similar exercise to identify a reasonable objective on the death of the client or spouse. In addition to looking at the objective from this perspective, it’s also important to review some additional questions that need to be considered. Some examples include the following.

• Will a currently non-working spouse return to work on the death of the other spouse? If so, when would they return to work and what would be a reasonable level of income to expect they could earn?
• If the primary care giver in a family with children dies, what additional expense would the family incur to replace the services formerly provided by that caregiver? This might include day care; homemaking; transportation expenses etc. All of these additional expenses need to be recognized when setting a survivor income target. Often it’s just assumed that overall expense would reduce given one less person to provide for. However, in looking at just these few issues, this is not necessarily the case.
• Another common comment made by clients is that “my spouse would remarry”. While this is always a possibility, consideration must be given first to the likelihood of this and also, planning for this as the only option for the surviving spouse is inappropriate. A discussion along these lines can help the client recognize that providing adequate protection can give the survivor options that they wouldn’t otherwise have.

Whatever the case, when it comes to planning for needs on death, if you have accurate and thorough insights into your client’s thoughts on these kinds of matters, your analysis of their situation will be less open to dispute since you have already recognized all of these issues. It makes the implementation of insurance solutions to fill shortfalls a natural part of the process.

Needs on Disability Goals Audit Process

The issues here are much the same as with needs on death. Knowing your clients concerns will allow you to perform an analysis that reflects their priorities and views. When it comes to disability however, you have one additional problem. This are the issue and participation limits put in place by the insurance companies to ensure that client’s are not over insured when it comes to disability insurance. The last thing insurance companies want is for a client to have no incentive to return to work and making too much during a period of disability . . . this can create an incentive NOT to return to work.

What this can mean is that your analysis on disability may call for levels of coverage that are not achievable because of these issue limits. In that case, some creative use of insurance products can help to bridge the gap, such as the use of waiver of premium benefits; use of retirement savings protection insurance and even critical illness coverage. However, often these issue limits mean that, in reality, some objectives may have to be scaled back on disability. It’s better to recognize this up front than to have an unhappy client who is now disabled and finding out that their lifestyle will be negatively impacted as a result of a long-term disability.

Estate Planning Goals Audit Process

When doing estate planning, a thorough understanding of your client’s objectives is very important. Some of the issues you need to confirm are:

• How the client wants their estate distributed. Particularly bequests and legacies to parties other than the surviving spouse;
• Specific goals relative to the transfer of any business interests or a family farm; and
• Family dynamics that might require special attention in the planning process.

There is a great deal of incremental data that you require when doing estate planning, e.g. beneficiary designations on all RRSPs and other holdings that provide for named beneficiaries. Whether joint holdings are tenants in common or joint tenants. Disclosure of beneficiary designations on all life insurance contracts as well as the investments’ adjusted cost base to identify any taxes payable on first and second death. Estate planning is probably one of the components where the highest degree of disclosure is needed in order to do the job well.

Conclusion

As mentioned earlier, confirming your client’s goals are realistic, achievable and sustainable is very important. A discussion and audit process for this purpose can also solidify your relationship with your client. By its very nature this process demonstrates your thoroughness as a financial advisor, and your care and concern to do the job well for your client.