Focus on Client Funded Status, not Probability of Success

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Every financial plan, regardless of the way in which it was created, requires ongoing monitoring. Here is one way advisors can measure the “funded status” of a plan to determine if adjustments are necessary.

Monte Carlo models that utilize reasonable assumptions can better facilitate one-time client decisions than deterministic models because they show a range of future results and probabilities of success. On the other hand, those probabilities of success may not be as effective as metrics produced by deterministic models used in a dynamic process to facilitate ongoing planning decisions in retirement.

In this article, I discuss:

  • The important difference between one-time and ongoing planning that advisors fail to adequately address with their clients when developing a plan;
  • How focusing on a client’s periodically measured “funded status” makes ongoing planning easier to communicate and more effective; and
  • How the plan-adjustment process can work on an ongoing basis.

One-time versus ongoing planning

Before employing a specific model to help retired or near retired clients make better financial decisions, an advisor and their client should have a “meeting of the minds” on the purpose of the planning exercise and client expectations. For example, will the client want a high probability of being able to spend $X (real) dollars per year so they can just charge ahead and spend that money even in the most extreme scenarios? Or will the client be willing to make periodic adjustments in the ongoing spending plan when necessary to either avoid spending too much or too little in retirement?