Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

The Planning Process is More Important Than the Plan

November 2011

The political clashing that is occurring over our country’s entitlement programs highlights an ideological divide in our country over how to solve our deepening debt crisis. But it also highlights an important facet of Comprehensive Wealth Management: assumptions about the future are just that – assumptions – and should not be set in stone. True wealth management is a dynamic process and must revisit assumptions and expectations periodically to ensure they continue to be valid.

This has been contrary to the way much of the financial planning industry has operated over the years. Too often, financial planners are obsessed with the creation of “The Plan,” and giving their clients dozens of tactics to implement. Often these plans span more than 100 pages and overwhelm clients with mind-numbing detail and regimented action steps. (I won’t even mention the faux plans generated by the commission-based planners that always seem to lead back to the same conclusion: “You need to buy a variable annuity.”)

Today, the growing realization among serious wealth managers is the need to focus on the planning process, rather than be obsessed with the plan itself. That doesn’t mean, of course, that a wealth management plan isn’t important. What it does mean is that, in a world of rapidly changing facts and circumstances, a wealth management plan should be a living document that is evaluated frequently and revised as needed to reflect the evolving needs of the client, and the evolving world around them.

Assumptions about expected future income must be revisited regularly, particularly as they relate to pensions and entitlement programs such as Social Security and Medicare. Many pensioners have seen their companies head into bankruptcy and have received vastly reduced pensions that were only guaranteed for pennies on the dollar by the federal government. And although the politicians seem to be nearly unanimous in agreement that Social Security and Medicare will be protected for those who are in or near retirement, the same is not necessarily true for those in their mid-50s and younger. Much will be determined about this issue in the elections of 2012 and beyond, and a wealth management plan for someone in their 40s or 50s that assumes a significant benefit from Social Security and Medicare – particularly if those assumptions are inflation-adjusted – may well be unrealistic in its conclusions.

The other issue that is changing rapidly is the lifestyle of people in their 70s, 80s and even 90s. A generation ago, 65 was considered “old.” Many people smoked heavily, drank excessively, and exercised infrequently. As a result, average life expectancy for a U.S. male was 66 years old in 1960. For women, it was 73.

Fifty years later, in 2010, average life expectancy for a U.S. male had advanced by a full decade, to 76, while the average U.S. female had a life expectancy of 81. Today, most 65-year-olds who haven’t had the misfortune of being hit with a chronic condition or disease are active and in good health. Cancer and heart disease are much more treatable today than they were even 30 years ago.

All of this is good news from a quality of life perspective, but it also raises significant wealth management challenges. The old assumptions that a 75-year-old will need little more than food, shelter and a comfortable rocking chair are a cliché. Many people in their 70s and 80s are continuing to travel, dine out, play golf and tennis, etc. At the same time, many people are retiring earlier than ever, in their early 60s or even late 50s. This means many people will live more active retirements with much higher expenses than past generations, and will do so in many cases for 25 or 30 years!

These challenges are not insurmountable; they simply require an effective planning process. That’s why it is vitally important to be sure your wealth management plan is being revisited, evaluated and revised at least annually by your advisor.

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