Tuesday, February 9, 2010

Needs Based Planning

           Probably the most popular and naturally flawed form of financial planning is called needs based planning. This method is widely accepted and commonly practiced. 95% of financial planners and advisors would likely use this method. It very logically calculates what your monthly expenses will be at retirement by adjusting your current monthly expenses for inflation. Then, using your estimate of the time between retirement and death, it calculates how much money you will need at retirement in order to have income for the rest of your life. Then, again discounting for your planed rate of return, it calculates how much money you will have to invest every month in order to reach your goal. Below is an example of a needs based plan.

Current Monthly Expenses                                     $5000.00
Years Till Retirement                                                   30
Estimated Inflation                                                     4%
 Monthly Expenses at Retirement =                        $16,217
(This is how much your living expenses will be in 30 years when you retire)

Estimated Years in Retirement                                    20
Estimated Need for Retirement =                        $2,676,167
(This is a lump sum you will need in order to retire)

Estimated Rate of Return                                          10%
Monthly Investments Required =                            $1,176

            If you notice how many times estimates are included in the calculation (4 times) you will begin to see the first and most basic flaw.  It is all an estimate assuming that some very volatile things will remain consistent. If any one of these things is off in the slightest way it could mean disaster. In this case disaster means going back to work or moving in with your children during retirement. Neither of these things would be the end of the world, but neither are they ideal. Over the few weeks I plan to discuss a number of these variables, and other variables that aren't so obvious. I'll discuss where we have been and where we are headed. Email me with requests that you might have for topics that will be discussed first. bbowman@richestmaninzion.com


Cathryn said...

Isn't being the "richest man in Zion" an inherent oxymoron? I guess we don't have to worry about that whole "no poor among them...one heart and one mind" thing when making the big bucks is the goal, right?

Benjamin Bowman said...

That's a very good thought. I would recommend reading the posts below. They address this issue specifically. In fact most of my January posts are about this subject.



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