Economics-based financial planning can smooth out the rough patches to achieve spending goals in retirement.
Economics-based financial planning helps clients meet a lifestyle spending goal for their lifetime, can provide a legacy, and maintains liquidity to cover unexpected expenses and contingencies in retirement. While it may sound like conventional financial planning, several key differences with economics-based financial planning benefit both clients and advisors during up and down markets.
Mary Lyons, the Wealth Woman, founder of Benchmark Income Group, a General Agency appointed with the insurance companies of OneAmerica®, discusses economics-based financial planning and how it moves beyond an investment-only mindset and focuses on post-retirement spending targets.
What is economics-based financial planning?
An economics-based financial plan is based on a strategy that strives to work no matter what’s happening in the economic environment. It focuses on a household’s living standard as opposed to solely focusing on financial assets. It’s a dynamic system that allows you to potentially have more income — whether you’re aggressively pursuing investments that are producing cash flow or stock market investments and insurance.
What is the most significant difference between economics-based financial planning and conventional financial planning?
Economics-based financial planning allows for much more flexibility and focuses on optimizing income strategies. It’s much more holistic. The goal is to achieve consistent living standards — a reliable ability to spend — in good times and bad. You create a system in which the client’s dollars achieve multiple results instead of just parking them in an investment portfolio.
If you take the traditional approach, you may be advised that a safe withdrawal rate at retirement is between 3% and 4%. But with an economics-based plan the withdrawal rates can range from 5%-13%, depending on when you retire. Because you divert some of the dollars that were going into investments into insurance, you’re withdrawing at a higher percentage of invested assets, but your asset base is smaller. It typically equates to a 30-70% higher income each year.
How does life insurance factor into this approach?
Frequently, the vehicles that provide the most growth during the accumulation period are the most difficult from a distribution standpoint because of the volatility. The insurance component offers the stability that you cannot get anywhere else. It allows you to be more aggressive with the way you spend your other investments. In the years when your investments are nonperforming or you take a loss, the cash value can back you up, providing an alternate source for capital.
Can economics-based financial planning be used with varied risk tolerances?
You don’t have to take more risks if you are more efficient; however, if you like taking risks, the efficiency of an economics-based approach will still help you. So, it can be adapted across all risk tolerances.
Why does economics-based financial planning appeal to advisors?
The approach can offer advisors more credibility and clients more efficiency. The advisor can be measured beyond just the rate of return — relieving some pressure. You still have to grow the assets, but you can show the potential for more income even when returns may be down. When using economics-based approaches, we’re trying to preserve principal over time. Because it’s not a constant depletion of investments due to the complement of the insurance, the advisor is managing the assets longer.
How would an advisor who is new to this approach get started?
Advisors have a few options. A mentor who takes an economics-based approach can demonstrate the big-picture strategy. Software platforms can teach and provide economics-based financial advice. In our office, we teach advisors this approach via a rigorous six-month program.
Help Your Clients Move Through Life With Flexibility
To learn more about how economics-based financial planning can help your clients meet the financial goals of retirement while also managing the risks, visit EconBasedPlan.com to download Help Your Clients Flex with Economics-Based Financial Planning.
Registered Representative and Investment Advisor Representative of and securities offered through OneAmerica Securities, Inc., a Registered Investment Advisor, Member FINRA, SIPC. Benchmark Income Group and The Wealth Woman are not affiliates of OneAmerica Securities or the companies of OneAmerica and are not broker dealers or Registered Investment Advisors.
Investing involves risk which includes potential loss of principal.
Life insurance should be purchased by individuals that have a need to provide a death benefit to protect others with insurable interests in their lives against financial loss. Life insurance is not a retirement plan, investment, or savings account.