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crystal ball

Properly Predicting a Client’s Future

Switch your crystal ball to “conservative” when completing financial plans...

When creating and updating financial plans for your retired or retiring clients, their current situation and data are the most important determinants of the plan’s outcome, and there is not much you can do to change those figures. But the hypothetical variables you use to forecast the future can make a big difference in how useful and accurate the plan will be.       

Here are some hints to use when projecting the unknown.

Rates of return

It’s tempting to use a high single-digit figure for future annual returns, but doing so could give the clients a false sense of financial security and an overly optimistic expectation of your investment abilities (much of which may be beyond your control). Erring on the side of caution is even more crucial for conservative investors, who are unlikely to get big future gains from investments with a lower risk/reward proposition. Instead, dial the figure down to something closer to the low-to-mid single digits, and then (hopefully) the clients will be pleasantly surprised by the actual returns.

Life expectancy

After future investment returns are hypothesized, the next most crucial question is equally difficult to answer: how long the clients will live. The sensible, conservative approach is to overestimate the length of the clients’ lifespan, so that they hopefully won’t use up their money while they still have a need for it. Online life expectancy calculators abound, but one of the most thorough can be found at


The positive side of the sluggish economic growth environment is that barring a long-term health crisis, clients’ non-discretionary spending expenses are unlikely to increase drastically during retirement. Therefore, you should be safe using a conservative rate of spending inflation. Even using 2 percent would be substantially higher than the current annualized Consumer Price Index, which was 0.8 percent for the twelve months ending in July 2016.

Income increases

The downside of a lower inflation rate is that annual increases in retiree Social Security checks are likely to be in the same 1-2 percent range.

That, of course, assumes that the Social Security program is able to meet future obligations to beneficiaries. The most recent estimates from the Social Security Administration say that the current surplus will run dry in the year 2034, after which benefits may be reduced by 20 percent or more.

Pension beneficiaries could be in for an even bigger shock, as underfunded pension accounts using overly optimistic future estimated returns could mean less-than-expected checks down the road. Therefore, use a very low inflator for these sources of income, and discuss the possibility of reduced amounts in the future with the clients.


Legislated tax rates in the future may certainly be higher, but that doesn’t mean that your retired clients are going to pay a greater percentage of their income to taxes than they did while they were working. First, they may be able to live on a lower income than they previously earned while working. And the Social Security payments they receive likely will be taxed at a lower overall rate than other ordinary income, as will most dividends and long-term capital gains. Finally, they may be able to fund some of their living expenses by drawing from Roth IRAs and non-retirement savings accounts, which won’t be taxed at all.


It’s important for the client to total up their typical monthly spending, and provide the figures to you to add to the financial plan. But, the exercise will also force them to know where their money goes, and perhaps look for some ways to reduce unnecessary expenses. Request updated figures periodically so that the clients are compelled to monitor the spending, and see if the latest amount matches their original estimates. And when making projections for spending in retirement, don’t forget health care expenses, even for those clients covered under Medicare. Fidelity Benefits Consulting estimates that a male and female couple who are 65 years old in 2016 will spend $644 per month on Medicare Parts B and D, and supplemental insurance if they live to ages 87 for the husband and 89 for the wife.

Real estate

Usually the value of the clients’ primary residence should not be included in the assets that could be used for income in the future. Instead, any accumulated equity could serve as an emergency source of funds for an unexpected crisis. Such events might include uncovered medical or long-term care expenses, or simply running out of more liquid assets.

The home equity can be realized by a sale of the property. But if the clients want to and are able to remain in the home, they may be able to stay in the house and raise cash via a home equity loan or line of credit, or a reverse mortgage.

The good news is that the longer the clients keep the home, the more likely it is that it will increase in value. The bad news is that it will also be more likely that the clients will incur hefty maintenance, remodeling, and renovation costs.

Travel expenses

Chances are that your retired clients are not going to just sit at home and wait to die. According to a survey conducted by AARP Travel, 99 percent of Baby Boomer respondents were planning to travel this year.

But that wanderlust can be financially detrimental to those who are just on the edge of financial security. By the same token, lifelong penny-pinchers can have a hard time spending several thousand dollars on something as superfluous as a trip, even though they can easily afford the cost. Add to the plan an extra, say, five to fifteen thousand of annual expenditures for travel for ten or fifteen years after retirement. Those who can’t afford it will see that they should perhaps reduce both the number of trips and the number of dollars spent travelling. And those who can afford the expense will realize that they’re more likely to lose the ability to travel than they are to run out of the money to pay for it. 

TAGS: Real Estate
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