A Shortcut for Determining Retirement Expenses

Determining how much income a client needs in retirement is a critical step in building a retirement income plan. However, because of the data gathering that is required, this step can sometimes derail the plan. I wonder how many times you have met with a prospective retirement planning client and sent them home with a long data form to complete only to find that they first reschedule and then finally cancel the next meeting.

I recently observed such an experience when I recommended an advisor to a neighbor. They had their first meeting, my neighbor liked the advisor and the experience, and then went home to fill out the multi-page questionnaire. After months of procrastinating – and constantly telling me that he had to get around to filling out that form – the process fizzled out and that next meeting never happened.

It would be helpful if the process of coming to a reasonable determination of retirement expenses could be done with the client in the office in 10 minutes – and that the number can be on point, and maybe more important – a number the client could live with.

In a video interview called “Calculating How Much Income You Need for Retirement” with Curtis Cloke, CLTC, LUTCF, RICP®, Principal of Acuity Financial and Thrive University, and a regular contributor to the RICP® curriculum, we discuss this issue.

Curtis starts by talking about how he had to give up those client questionnaires because of the problems they caused with the planning process. He describes the simple alternative process that he now uses for helping clients determine how much after-tax income they need in retirement.

He asks the client to bring in a W-2 pay stub to the first meeting. Looking at that document, he asks the client whether the after-tax check that they are getting and depositing into their checking account is covering all their expenses. Curtis says that in many cases the answer is yes – and the next step is to determine the number of pay periods in a year and convert this number to a monthly after-tax amount.

He also asks two additional key questions – one is “Do you have any expenses that will stop at some point, like a mortgage that will be paid off or a when a child finishes college?” If the answer is yes, the expense number is reduced to reflect this change. The other question is, “Do you want to maintain the same lifestyle in retirement?” In many cases the answer is yes – and now he has a good starting expense number that the client can agree to as the starting point in planning.

After that, we talked about whether it was appropriate to adjust the required income by inflation each year during retirement and what you do if you have overestimated income needs. But he does a much better job of explaining these issues than I can, so I recommend that you watch this excellent video!
 Curtis Cloke and David Littell

 This blog is part of a series by Professor David Littell, Director of the RICP® program and Co-director of The American College New York Life Center for Retirement Income. Each post in this series will feature a video or videos from the Center offering valuable retirement income planning tips for advisors and their clients. Many of the experts in these videos are featured in the RICP® program curriculum.