Planit:Personal Financial Strategy Case Study

From Planipedia

One of the Web Advisor’s strongest tools is the AutoModel process, which creates a model strategy that eliminates capital shortfalls for retirement, based on your clients’ goals, thresholds and priorities. It will run up to 50 what-if scenarios – complete with full tax calculations every year – until it finds a suitable strategy and forms a detailed action plan for your client.

Example Problem One:

Donna and Harold Woodhaven have given you all required information to produce a Personal Financial Strategy:

They have told you that Ben’s education is their most important goal, and then their retirement lifestyle. Also, while they would like to give a gift to their parents, they would find a way to split it with siblings if it jeopardized their retirement cruise.They only require $70,000 of retirement income, or $55,000 at the bare minimum. In order to achieve their goals they are willing to save an extra $4,000 each year, and push their retirement back to their age 60. However they would rather reduce their retirement lifestyle than work longer.

While they want to have the PFS document to review for later, they want the focus of your presentation to be a summary of their current shortfalls, the modeled scenario and its implementation.

Solution Using the Personal Financial Strategy:

To View the Personal Financial Strategy:

1. In the Your Working Documents screen, click on the title called Preparing Reports – Life Planning. (See Figure 5.9)
2. Click on the Radio button beside Personal Financial Strategy.
3. Click on the Generate Document link. The PFS will take approximately two minutes to generate. Hit the Refresh button periodically until the completed document is ready for you to download.
4. When the document has completed calculating and is ready to view, click the Download button.

When you open the Personal Financial Strategy document, you will notice a Table of Contents on the left hand-side of the title page. As you can see, there is quite a bit of content in this 20-page strategy; however we will only cover the highlights produced by the AutoModel process.

1. Scroll down to the section titled Life Goals Retirement Analysis – Current Situation.
2. Read the second paragraph to identify the overall capital shortage in today’s dollars.
3. The graph displays how your clients’ investment capital will grow and decline over their lifetime. There will still be the inflows of any pensions, but there will not be anything to supplement these, and thus the retirement lifestyle will be curtailed.
4. In the last paragraph, there is an indexed savings amount, showing how much the Woodhavens would need to save each month in order to bridge the capital shortfall.

The next page identifies all the inflows and outflows over time, of all streams input into the process flow, and how this results in a capital shortfall.

The following page, Life Goals Retirement Strategy, identifies the major changes that have been made using the AutoModel process in order to produce a working strategy.

1. The first change that is made using AutoModel is the new rate of return using the target portfolio. Under the Portfolio Returns section, you’ll see the variance in rates of return applied to investments.

2. The second change is made to any additional annual savings. In the Savings section, you can identify them by noting any variances greater than $0.

3. Next, AutoModel will reduce any goals ranked lower than the retirement lifestyle in increments of 20% to try and eliminate the remaining capital shortfall. So, as can be seen in the Other Objectives section, the cruise and the gift to the parents were reduced by their total original value, meaning they were eliminated altogether.

Note: This does not mean your client cannot attain these goals but that they cannot fund them as an extra expenditure outside of lifestyle, using their savings and investments.

4. Since you indicated that the Woodhavens wanted to adjust income before age, the next step was to decrease the client’s retirement lifestyle by increments of 4%. The variance shows that the retirement lifestyle was reduced by $15,000 each year.

5. The client’s reached their minimum retirement lifestyle, and still had a shortfall, so next the AutoModel increased the clients’ retirement age by one year at a time.The variance section shows they can plan to retire at age 60.

6. After all these changes, at the bottom of the page the projected estate surplus is shown, given that this new strategy is implemented properly.

The next page identifies all the inflows and outflows over time, for the modeled scenario.

The following page, Before and After – a Comparison of Results, compares the current and modeled strategy graphically and numerically.

Go to the exercise to test your knowledge on identifying your clients' shortfalls and model strategy using the PFS.

Note: Results may vary depending on your deployment, planning jurisdiction and simply over time. Your spreadsheets may not look exactly the same as shown here.