Understanding annual spending is a key factor in achieving long term goals

Understanding annual spending is a key factor in achieving long term goals

When we enter into an engagement with a new client, the first part of our process is to identify and understand their goals for their wealth.

In order for us to develop an estate plan, identify tax planning opportunities, or advise on the structure of their investment allocation, we first must know what it is that they hope to accomplish. Goals may center on maintaining a certain lifestyle after retirement, executing a seamless succession plan for the family business, or establishing an estate plan to support a philanthropic organization of particular importance to the family. Whatever the goals may be, they will be best supported by careful coordination of all of the components of the client’s financial life. Only when we have a complete picture of a client’s financial situation, can we develop a comprehensive strategy to help them achieve it.

Integral to supporting a client’s wealth management goals, is learning what their lifestyle expenses are, what they expect them to be in the future, and determining the cash flow required for both scenarios. This can be a challenging process, as many high net worth clients do not know what their annual expenses are, nor are they aware of all of the elements which comprise this figure. They most likely know what their mortgage and car payments are, but may overlook other components, including potentially substantial line items, such as intra-family loan payments, philanthropic donations, gifting contributions, travel, insurance premiums, and a host of other expenses. Provided with a current tax return, an experienced advisor can piece together the income side of the equation, but without accurate reporting on the spending side, building cash flow projections to retirement and beyond is virtually impossible. As they say, garbage in, garbage out. Fortunately, there are many online tools (Quicken, Mint) available to help individuals and families get a handle on their expenses.

At Waldron, we work to gain a complete understanding of a client’s current and anticipated annual expenses, so that we can conduct the analysis necessary to provide what they are ultimately looking for – a plan that will allow them to look to the future with confidence. A key component to developing an appropriate planning strategy for a client, is conducting a lifestyle security analysis. By identifying a client’s true annual spending figure, and applying long-term annual portfolio return and inflation models, we can get a clearer picture of the outcome they can expect at current spending levels, as well as projected outcomes based on spending adjustments. By integrating this information with our comprehensive strategy for the other components of their financial picture, we can simplify the decisions they will face, and provide an invaluable sense of security about what the future may hold. Lifetime security analysis is one of many cash flow management tools employed by our wealth planning team to provide clarity and confidence for our clients, and it’s a tool that leverages one of the few financial variables they are able to control, namely spending.

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About the Author

Kevin Searfoss, CFP®, CDFA®, BFA specializes in providing comprehensive wealth planning for our clients through customized and integrated trust, estate, and multigenerational strategies. For more than 25 years, he has been helping entrepreneurs and their families simplify their financial lives.

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