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In one of our previous Acorns articles we introduced Moneyguide Pro (MGP), financial planning software we utilize to give clients confidence in their retirement plan. After introducing MGP, we wanted to showcase the software in action through a case study. This study is a demonstration of how MGP's confidence zone could persuade clients to change their spending habits before and during retirement.
Meet Mr. John and Jane Doe our guinea pigs. We will see how spending all of their discretionary income versus saving pre-retirement drastically changes the confidence zone. Let's set the stage for this example:
John and Jane fit a standard profile that we see often. They have solid income, no overwhelming debt (with only a mortgage), are contributing to their employer's sponsored 401k's or participating in retirement accounts, BUT outside of this they have no additional savings. You can add the anecdotal script yourself for what their spending habits are:
After establishing a base line picture of who the Doe's are, let's describe some of Moneyguide Pro's terminology before we go on:
Confidence Zone - the aim with MGP's confidence zone is reaching the 70-90% window. This Zone measures the percentage of trials (out of 1000) where the client did not run out of money allocated for their goal, in this case retirement. (in future case studies John and Jane Doe will have multiple goals besides just retirement spending ie. boat, college tuition, international travel, etc.)
Estimated % of Goals Funded - each retirement plan has a total funding goal based on cumulative spending in retirement with inflation. (see Figure 2 for total spending for life of plan)
Average Return - shows the % of goal funded given average investment returns throughout plan life.
Bad Timing - shows the % of goal funded given average investment returns throughout plan life, BUT it shows the impact of bad timing of these returns (poor returns in years closest to retirement).
Prior to any planning, John and Jane envision working another 10 to 11 years, retiring, and then living off of their social security and nest egg. Given the trajectory that John and Jane are on, let's see how confident MGP is of them funding their retirement spending goal of: $170,000 (in future dollars) per year or $3,720,512 for the life of the plan (a 68% reduction from their current lifestyle).
The program allows quick side by side comparisons to show the affects of different decisions. Above, they wanted to know if cutting retirement spending by 20% would move them into the confidence zone? Even though the side by side shows vast improvements, they still need to implement some different habits in order to fully fund their retirement goal with confidence.
In this side by side, John and Jane reduced their pre-retirement spending and contributed those dollars into a taxable investment account ($30,000 per year). In addition, they kept their reduced retirement spending goal from Figure 2. This combination proved to be the solution to get them into the confidence zone.
To sum up this case study:
John and Jane seemingly had many of the 'financially smart' boxes checked. 1) Great income 2) no overwhelming debt with a house payment they could afford 3) contributing to retirement accounts BUT, their achilles heel was spending their remaining discretionary income! It is easy for people to grow accustom to the lifestyle they can afford while they are making great income and assume that you'll always be able to afford that lifestyle. MGP helped educate John and Jane on the total assets it would take to drive their desired retirement lifestyle. Luckily for John and Jane, they had time to make the shifts in spending before it was time for them to retire.
Stay tuned for the next case study with John and Jane Doe!
Lee has been with H.I.S. since its inception in February of 2011, and is a local native to Northwest Arkansas. Under Jim’s apprenticeship he has gained experience in the areas of wealth and risk management and client services. He...
Will joined H.I.S. in April of 2022 after beginning his career at Edward Jones. Prior to working in the securities industry, Will graduated from Ouachita Baptist University in 2019. At Quachita Baptist will received his BA in Finance...
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