Don't Forget About Retirement Cash Flow

Understanding a client's short- and long-term goals is just the first step in crafting a strategy to help them realize that those goals and needs must be accompanied by a long-range strategic plan that considers both cash flow and income during retirement.

The original iteration of cash flow planning was tedious and time consuming, which is one of the reasons why goals-based planning came to the fore. The previous generation of goals-based tools often under- or overestimated where a client would be 10, 20 or 30 years down the road, but it's easier now to make accurate long-term projections. Advances in technology, including the creation of sophisticated calculation engines, over the last few decades have made it possible for advisors to combine goals-based and cash flow approaches so they can provide holistic advice.

Cash flow planning doesn't have to include an itemized budget, but should list all the major spending categories — monthly bills, including mortgage or rent; necessary expenses; savings; discretionary items — and give the client at least a basic idea of how much money they have coming in and where it is going. Inflation and healthcare costs, which can be considerable, need to be planned for as well. The amount spent on travel and recreation, as well as cost of living in a particular area, are all things that might be left unconsidered in a goals-based plan. Remember, financial planning is not about predicting the future, but rather about being prepared for the unpredictable.

And that's why cash flow projections are so important. The Retirement Income Industry Association suggests creating two sub-portfolios of assets. The first represents the "floor" and is expected to supply the necessary income to meet predictable expenses. This portfolio should include all potential sources of retirement income — Social Security, 401(k)s, IRAs, annuities, bonds, and anything else that delivers regular payments that can cover monthly expenses.

Only after the basics are covered does RIIA suggest trying to secure additional income by putting assets into an "upside" portfolio of stocks and other investments that can attempt to capture the market's positive performance, while keeping the floor portfolio safe.

This ability to combine the best of goals-based and cash flow approaches is what I like to think of as the third wave of financial planning — an approach that harnesses technology in the service of creating better financial plans that help clients achieve their dreams.

Angela Pecoraro is CEO of Advicent, the financial planning technology provider for more than 140,000 financial professionals across more than 3,000 firms worldwide.