Viewing the couple’s Cash Flow chart shows that there is unallocated income each year prior to their planned retirement at Betty’s age of 60, this is labeled as Unallocated Income. The excess cash flow increases in 11 years when Betty is 53 because the LOC is fully paid off freeing up $400 per month.
This chart also shows that based on the current savings level and rates of return the couple will have retirement income shortfalls starting at Betty’s age 79.
The Retirement Options screen confirms that they are not on track to maintaining their current lifestyle throughout retirement. If the Jones make no changes to their current plans then they will likely have to adjust their planned retirement lifestyle as seen in Option #1. Alternatively, Option #4 states that they could also increase their planned savings today to meet their desired retirement lifestyle.
After reviewing the Jones’ current situation we can show them that by managing their pre-retirement cash flow and optimizing excesses we can better prepare them for achieving their goals. If they lock down their current lifestyle expenses to only increase with inflation, assuming 2.5%, then in the near future more income will be available for investing. We can do this by making the following recommendations:
- Direct all excess income to the line of credit until it has been paid off and resist using it moving forward
- Once the line of credit is paid off, direct 60% of excess toward investment accounts, specifically TFSAs
- Leave the remaining 40% unallocated as a buffer for incidental expenses
After optimizing the use of their unallocated income, the Excess Cash Flow chart shows that the line of credit will be paid off by the end of the year Betty turns 46. This chart also shows the increase in savings to their TFSAs starting at age 47 and a small portion of unallocated income continuing to retirement.
Looking at the Cash Flow chart after making the recommended changes we can see that their desired lifestyle needs are now fully funded right through to age 90.
In addition, the remaining unallocated income could still be utilized should the need arise or should their lifestyle needs increase in the future.
Viewing the Retirement Options screen shows that by paying off their debts over the next 5 years and then increasing the savings for retirement, they will be able to meet their retirement income and age goals.
When integrating pre-retirement cash flow planning into a retirement plan, advisors can benefit from using the Cash Flow Allocation report that is provided in RazorPlan. This report can be printed by itself from the Excess Cash Flow manager area of the program. Or it can be included when printing the Full Report so that it is integrated into the plan.
By focusing on the next 5 years, this report makes it easy for the client to understand the changes needed in their pre-retirement cash flow to accomplish their goals. The Excess Allocations section shows the annual changes required according to the recommendations.
How To Build with RazorPlan:
This case requires the following account level assumptions set on the Settings tab in Your Account. Results will vary if these assumptions are not set up in your account.
- Set Stop Income At to Assumed Life Expectancy
- Set Pre-Retirement Cash Flow to On
Step 1 – Download and Open ‘Cash Flow Planning’ Razor Academy File
Select Razor Academy from the RazorPlan home screen. From there select “Cash Flow Planning” and click Download. The sample case will download to your RazorPlan account and automatically open.
Step 2 – Review the ‘Cash Flow Planning’ Case
Click on the Chart button on the RazorPlan toolbar to view the charts of the couple’s current situation.
Step 3 – Create a New Scenario
Before beginning to work with this client file, it is important to create a new scenario to retain the original Base Data scenario. By creating a new scenario you will be able to compare your recommendation to the original scenario.
Click the Scenarios drop-down menu and select the Copy Scenario. Name this new scenario “Recommended”. Once created, the new scenario will load. You can return to the Current Situation scenario at any time through the Scenario list drop-down.
Step 4 – Add the Recommendations
To model the recommendations provided in this case, open the Excess Cash Flow Manager and enter the following settings:
Step 5 – Print the Cash Flow Allocation Document
There are two ways to print the Cash Flow Allocation document for use with your clients.
From the Excess Cash Flow manager, you can print the Cash Flow Allocation document using the Print button located above the data entry panel. When using this method, the Cash Flow Allocation document will print along with the cover and disclaimer documents.
The Cash Flow Allocation document can also be included in the Full Report. To print the Full Report, select the print button from the RazorPlan Toolbar and select the checkbox next to Cash Flow Allocation.
By following these steps, RazorPlan allows you to show the impact proper cash flow management can have on this couple’s ability to meet their goals.