I hope that you’ve had a chance to read The Retirement Planning Paradigm Shift – Part 1. If not, please take the time to do so. This is a continuation, promoted at the end of Part 1 as “Return of the Blog.” Have no fear. While it’s definitely more technical than Part 1, it’s not scary. Break out the popcorn and read on.
Similar to the scientific breakthroughs that Thomas Kuhn discussed in his 1962 landmark book, The Structure of Scientific Revolutions mentioned in Part 1, retirement planning is undergoing a paradigm shift. This is quite natural given the fact that financial planning as a profession is still in its infancy. Its origins trace back just 40 years when Loren Dunton, the father of financial planning who is credited with coining the term “certified financial planner,” set up the Society for Financial Counseling Ethics with a meeting of 13 individuals at Chicago’s O’Hare Airport in 1969.
In order to understand the retirement planning paradigm shift, let’s start by taking a look at two basic financial statements: the Statement of Financial Condition, or Net Worth Statement, and Cash Flow Projection. Both reports are frequently prepared by financial planners at the outset of a planning engagement and are typically updated throughout the course of a relationship with a client. A Net Worth Statement and Cash Flow Projection are used to plan for, and to monitor progress toward, the pursuit of one’s financial goals, including retirement.
The results of cash flow projections that professional financial planners have been preparing for years have only begun to be experienced and scrutinized by retirees during the last couple of decades. As with all new mthodologies, some prove to be successful and others need to be modified based on experience. Retirement planning is no exception.
Traditional retirement planning as it has been, and continues to be, practiced by most financial planners, focuses on the accumulation and “spending down” of one’s assets. This is, in essence, retirement asset planning. While this type of planning works well in the accumulation stage, ideally resulting in projections of sufficient retirement capital when conservative assumptions are used, unfortunately, it often proves to be inadequate for meeting one’s needs when the plan plays out in retirement years. The reasons why this occurs are important and will be the subject of a future blog post.
As a result of the uncertainty of traditional retirement asset planning as a solution for providing a predictable income stream to match one’s financial needs in retirement, retirement income planning was born. Cash flow projections incorporating the latter approach typically result in a better matching of projected income to projected needs, reducing the likelihood of outliving one’s retirement capital.
While this alternative approach is still evolving, it’s logically and emotionally more appealing than traditional retirement asset planning for someone who is within 10 years or so of, and throughout, retirement. When properly employed by professional retirement income planners, retirement income planning should ultimately prove to be a more effective strategy for meeting many indviduals’ retirement needs for the vast majority, if not the entire duration, of retirement.
Retirement income planning should supplement, and should not replace, traditional retirement asset planning at the appropriate stage in one’s life in order to provide a total solution. Understanding this phenomenon requires a paradigm shift that will become apparent in future blog posts and will hopefully be an “Aha!” experience, common to all paradigm shifts, that you can use to create a more rewarding retirement planning experience.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.