Retirement in a Nutshell is designed to give the professional advisor a quick overview
of a client's income, expenses, net worth, and cash flow from now until age 90 or
older if desired. It is intended to allow you to analyze a client's retirement situation
in less than 30 minutes including data input. You can even discuss it with the client
as you are working on it, make adjustments and hand the client the report at the
end of a one hour meeting. It quickly answers the main question most clients have.
How are all of my retirement income sources going to come together at some future
point in time? It also answers related questions. Am I saving enough? How much more
do I need to be putting away?
It is not intended to be a comprehensive plan that examines college funding, estate
planning, insurance needs, etc. There are plenty of excellent software tools out
there that may be used to do that. It does not include any canned language. It does
not have a myriad of line or bar charts. One of the problems with line and bar charts
is that they tend to show the lump sum results of calculations but not the detail
of the calculation or what was included in the lump sum. So, while a chart may tell
a client they are going to be okay, it does not tell them how they are going to
be okay. In that respect, charts are not as believable as a spreadsheet that shows
all of the pieces and each of a client's accounts and cash flow items and how they
generate income in retirement.
Retirement in a Nutshell shows the cash flow detail, year-by-year, left to right,
with five years shown on each single page. There may be a few clients who have so
many cash flow items it requires two pages but you can usually combine a few like
items to keep it on one page. It is much more effective and easy for a client to
follow on one page for each five year period.
Design Concepts
The program is designed to display cash flow. That means when you are entering "Income"
it means annual gross income you are receiving now or will receive in the future.
This includes such things as salary, Social Security, defined benefit pension payments,
alimony, child support, etc. There is a drop down box that will show you what to
include. It does not include income from investment accounts or investment real
estate which have their own tabs.
Most input pages have a drop down box for selecting whether that item should be
reported under the "Client or Spouse." This is not intended to show ownership for
estate or legal purposes. It is only used within the program to show when various
kinds of cash flow start or stop for the client or spouse. They might be retiring
or drawing from their IRA’s in different years. If the ownership does not matter
for a particular item, just enter it as the client’s.
Assets are items that will not be used for generating cash flow such as checking,
savings, residence, vacation homes, cars, etc. These items will show on the balance
sheet but not the year-by-year cash flow report. Items that will generate ongoing
income at some point are entered as investments or real estate tab under their respective
tabs. The real estate tab is only for investment real estate.
There is only one report that this program generates. It has several sections or
individual pages such as: Income and Expense that show how the client's expenses
are calculated; Balance Sheet that shows assets, liabilities, and net worth; Year-by-Year
pages that show cash flow from now until whatever age you enter on the plans tab.
The program has been designed with the data entry tabs running horizontally across
the top of the page and the report pages running vertically on the left side of
the page. This allows you to quickly toggle back and forth between entry items and
report pages to check for errors and accuracy. Also, be sure to select "Print Entire
Report" in order to display the report as a PDF file for download or printing.
The entire report will only be 15-20 pages long so it will not use up another tree
if you have to reprint it. The reports are just the numbers and no more writing
than necessary. This makes them straight-forward, easy for identifying errors, and
easy for the client to follow.
There is a sample intake form you can print and give to a client to fill out before
coming in. This can save time and you can have someone else enter the data for you.
It also gives you the opportunity to review the reports before meeting with the
client. There is one big downside with doing this. Clients hate to fill out any
forms and often will not come back in because they haven’t finished it.
The other option is to have the clients bring certain statements and records (not
too many) and to enter the data on the spot with the them looking on. There is a
list of items to bring you can print out to give to the client when using this approach.
This means the client doesn’t have any forms to fill out and just needs to show
up. If the client is not sure about an entry item, estimate it with them, and let
them take the final report home and call you with any changes. Since you are not
asking them to do any research on their expenses, most clients know most of their
numbers off the top of their head. They tend to know where their money is and how
much they have.
An Easier Way to Calculate Expenses
One of the biggest time savers is that the program calculates a client's expenses
for them. You don't have to ask them to itemize their expenses. It is also a more
accurate reflection of their true expenses. Nutshell calculates a client's expenses
by taking their gross income, subtracting income taxes and any money going into
savings. The rest of their money is spent. It has to be. There are no other alternatives
unless they are invading savings or building up debt every month. There are ways
to handle those circumstances but they should be rare for most of your clients.
The program then subtracts the monthly debt payments from the expenses since those
payments will stop someday and not be an expense throughout their entire lifetime.
After those items are subtracted, what is left are the living expenses that will
continue for the rest of their lives such as food, utilities, property taxes, insurance,
travel, entertainment, etc. This is their current standard of living that should
serve as the basis for measuring if they will have enough cash flow to maintain
that standard of living throughout their lives.
The bottom line expense number is the most important number in the plan since it
becomes the basis from which a client's cash flow adequacy is measured. It is important
to make certain the client has given you accurate and full information about their
income, savings, and taxes to provide them with an accurate report.
Taxes
Every client has a different tax situation reflecting their particular types of
income, deductions, depreciation, credits, etc. The program is not designed to do
tax accounting or deal individually with all of these types of tax variables. The
taxes are entered as a percentage of gross income under the Expenses Tab. The percentage
to be entered is the average or "effective" rate rather than the "marginal" rate.
There is an entry field for both State and Federal tax percentages, even though
the program adds them together to get an overall percentage and does not break them
out in reports.
For cash flow purposes, it is only important that the total taxes for the current
year be as close to the client’s actual total taxes as possible. For this reason,
I ask clients to bring their latest tax return with them or put their actual taxes
on the intake form. The tax return should take into account all of the variables
mentioned above for that client. If they have more deductions than most, their percentage
will be lower than most. If they have no deductions, their overall percentage will
be higher than most. It is reasonable to assume for most people that their tax situation
will remain fairly stable with regard to income, deductions and types of write offs
over the years so the percentage for taxes should also stay fairly stable. If this
is not the case, the program does allow you to change the overall tax percentages
one time in some future year. This is accessed under the Optional Entry button under
the Expenses Tab.
When you are first entering a client’s tax information on the Expenses Tab, there
is a tax table link that will give you an average tax percentage for various income
levels for single with no dependents or married with one dependent. It doesn’t really
matter too much what you enter at this point. Just put in a ballpark number and
then proceed with entering the rest of the client’s information. When all the client’s
information is entered, go to the Income and Expense page of the report and see
what the program has computed for total taxes. Compare that to the client’s actual
taxes and go back and adjust the percentages on the Expenses tab and check back
to the Income and Expense page. It should be easy to go back and forth between the
report and the entry tab a few times until the taxes shown on the report are very
close to the client’s actual taxes. After you do it a few times, it will become
easier to estimate and get closer with fewer back and forth moves.
Conservative Calculation Assumptions
Since the plan is intended to give a quick look at the client's big picture and
projections are only general targets, the plan is not accurate to the month. It
calculates things on an annual basis. If a client is going to retire during the
current year, it is best to show their full pre-retirement income for the current
year and show them retiring next year. This will give you an accurate number for
their pre-retirement living expenses to use for measuring cash flow adequacy during
retirement.
The plan is also conservative in how it calculates additions to and withdrawals
from retirement accounts. It assumes the annual additions go in at the end of the
year and that annual withdrawals come out at the beginning of the year. Once again,
the plan attempts to look at the big picture. There are so many variables going
forward that we felt exact numbers are not as important as getting a conservative,
general picture of where the client stands.
Defaults
To minimize data input time, the program uses, as a default, the assumption that
clients will stop receiving salaries at the selected retirement age and will start
receiving any monthly pensions in that same year. It also assumes that clients will
stop making contributions to their retirement income investment accounts at the
selected retirement age and that they will start drawing the designated income from
those accounts for the rest of their lives. The program does have optional, data
input fields you can customize for situations where these assumptions are not true.
The data entry pages have been divided into two sections. When you select a data
input category such as income, a list of all the income items previously entered
will show in a grid on the page. Above the list is a button for entering a new item
or you can select one of the items already entered to edit that item. When entering
a new item, or editing a previously entered item, you may click on the button that
says "Show Optional Entries" and change any of the default assumptions for that
item only.
Investment Returns and Withdrawal Rates
The rates of return used for projections in various investment categories are based
on relevant indexes and are fixed within the program. This is done to stay within
regulatory bounds. There is a wide range of choices that you can select and we have
tried to find long term, but conservative numbers for each category. We have used
a blend of stocks bonds and cash to represent blended accounts such as mutual funds.
We will continuously track these indexes to see if they need updating but, because
of the long term nature of the indexes used, they should not change very much over
the years. One of the report pages called "Index Returns" will show you and the
client the indexes and percentage returns used for each category. On the investment
data input page, there is a drop down list that allows you to select the index to
be used.
You may enter and use any withdrawal percentage rate for an account that you want.
If you use the same withdrawal rate as the return for that account, it will gradually
deplete the account because the withdrawals are taken at the beginning of the year
and returns added at the end of the year to be conservative.
Editing the Report
You can access the data entry pages using the buttons across the top of the current
page and the report using the left side menu. This makes it really fast and easy
for you to go back and forth to make any corrections. The client can look over your
shoulder as you enter the data and look at the report to help you find any errors.
Another suggestion is to get a flat screen desktop monitor with enough cable to
give the client a good position for viewing, and display for them what you are entering
on your computer. They will be able to anticipate the data entry and you will be
able to discuss each item as you enter it to make sure you are getting it right.
After data entry, you can bring up the report on the screen and discuss the results.
You can make any adjustments on the spot so everything is right before you print
it.
The only downside with this approach is, if the year-by-year report shows a significant
shortfall in cash flow at retirement, it can be a shock to the client. This can
be alleviated by preparing the client before opening the year-by-year report. You
can tell them there may be a shortfall and that there are several approaches to
dealing with shortfalls such as working part time a little longer, increasing investment
returns, or reviewing expenses for places to save.
If you want to create a second plan to look at an alternate retirement age or change
other data items and compare it to the current plan, click on the "Plans" button
at the top of the page, select a plan by clicking on the pencil to the left of the
desired plan and then click the "Copy as New Plan" button. A duplicate plan will
be created with all of the data from the current plan. If you wish to use an earlier
plan, select that plan from the list and then "Copy as New Plan." You can then change
just the items you want to adjust and compare the results between the two plans.
Only one plan can be loaded at a time so you may have to switch between them after
making changes. Another option is to have two browser windows open with different
plans loaded and toggle between the browser windows. The date and description of
the currently loaded plan will be shown at the top of the entry page above the buttons.
Program Security
The program is hosted on a secure server that is backed up daily. Beyond that, we
have eliminated any sensitive data that is not needed for preparing the reports.
You are not asked to enter client Social Security numbers, addresses, account numbers,
or birthdates. We only ask for the name and birth year for the client. This eliminates
most of the data that hackers would be hoping to find and use for their own purposes.
Clients are searched for by name under the planner's account and password. If you
have two clients with the same first and last name, you will need to differentiate
by middle name or use different forms or abbreviations for the names.
Printing the Report
The report is created in PDF format for easy downloading and printing. The report
can be generated from the web site for three years from the plan date. After that
plan data will be saved to offsite storage and can be retrieved by special request.
You can download the file to a location on your computer so that you can keep it
for as long as you want and can easily retrieve it if a client calls and you want
to review the plan to better answer their question.
The total report should be somewhere between 12 and 20 pages long, depending on
the client's current age. Since color is an important feature in viewing the year-by-year
report, a color printer should be used. The report is short enough to be printed
on the spot while the client is present and give it to them before they leave. The
client can review the report at home and check any numbers that were uncertain or
incorrect and then call you with corrections.
You can simply staple the report in the upper left hand corner. However, if you
would like to give the client a more professional and durable report to take with
them, it is recommended that you purchase a page punch at any office supply store
that puts a line of slots along the left side of the page and opens a plastic binding
to receive the pages. There are clear plastic cover sheets that are slightly larger
than the 8½ x 11 size of the report. The plastic sheets can be punched and placed
at the front and back of the report before binding.
Help
Every data entry page has an entry hints button in the upper right corner that will
give you information and tips for each data entry item. If that doesn't provide
enough information, or if you have further questions or suggestions for improvements
that you would like to see in the program, there is a "Contact Us" link on the home
page that will allow you to e-mail us. We will respond as soon as possible. One
of the nice things is that we can make changes, as long as they do not compromise
the speed and ease of use of the program, fairly easily and quickly.
I have one other suggestion before you get started. On the home page, click on the
sample report and print it out so you can refer to it when learning the system.
Then, click on "Reports Overview" tab under "Helpful Info" on the main home page.
That will provide you with a description of each page of the report and how to interpret
and use them with a client.
I think that is enough for you to get started. I hope you will find it an essential
tool in your practice and we appreciate any feedback. We would also appreciate it
if you tell your friends and if they sign up and give you as a reference, we will
give you an additional three months usage for free.