How Mission Wealth Uses Financial Modeling to Create Financial Confidence for Clients | MoneyGuidePro

In this brief video, we’ll give you an overview of our financial planning process and show you some of the scenarios we model to help you feel comfortable and secure in your financial independence. Let’s take a look. We first start with a brief inventory of your financial life. This is collecting your net worth, assets that you own, and liabilities that you owe, as well as your cash flow, income coming in, and expenses going out. So, we start with just a real brief sample. This is a sample client of about 5 million with investable assets in this green box that’s split between an IRA at 2 million and a trust account at your million. In addition to these investment assets, we track some other assets that don’t pay your grocery bill. The most common example of this is the value of your home. It’s part of your net worth, but you’re never relying on the value of your home to fund your lifestyle.

We then track liabilities, the most common of which is the mortgage, but there could be others like business loans, second properties, auto loans, etc. And this allows you to get a living and breathing net worth recap and review of where your assets are over time and how they’re growing. This system plugs directly into your Schwab and Fidelity accounts and updates every time we jump into it to show you a live tracking of your net worth. So, as an example, you’ll see here summary chart that is live tracking of your net worth. So, this syncs with your Schwab and Fidelity accounts and updates as the markets move and grow over time. You’ll see in the green bar the investment assets that are working for you to fund your lifestyle, and in the dark green, the other assets, the home, that are primarily part of your net worth. They’re not funding your expenses; some liabilities are in red, and when you subtract the red from the green, you get the blue, the net worth figure.

We move away from net worth and get into the cash flow side of things. So, this client, as an example, has some Social Security. This client is filing for Social Security later, and they’re collecting about 47,000 in Social Security benefits. And we have the ability to add other sources of income here. So this could be working by choice, such as part-time work, or maybe rental income, or if you had deferred compensation and other types of income down the line. In this case, we have not entered any sort of additional sources of income. Where we go from here is tracking the expense side. So we call these the goals. This is where we log all the wonderful things you’d like to do and some of the things you may not expect come your way. This is a simple example where we have some basic living expenses of about 100,000 a year plus some health care. We separate those because the cost of health care increases differently as you age than your grocery bill might.

And so the health care cost factors in your age, your health status, premiums of your insurance policies, etc. Over time, you’ll have some additional expenses. So maybe you want to frontload travel in years where you’re very healthy or have energy or have family members you can bring along. And then we also want to include some other one-off expenses that may not happen every year but should be part of the plan, such as a new car or a new roof. In fact, we can bake in a lot of other goals for the family, such as wedding gifts or helping children or grandchildren with down payments on homes, etc. And then we also put in some levers to show what are the limits of your plan which we’re going to get to. This is where we have a lot of fun, at least for us planners. So, when we get to the modeling side of our software, you’re going to see a lot of numbers that come up on the page in a moment.

This allows us to tell you how on track your spending level is relative to your assets, and then tell you what the limits of your plan are. So, there’s a lot of figures on this page, but let’s just focus on this first column, which is the baseline spend. This is saying, let’s look at all of the expenses we’ve got planned for you. subtract the income that we know is coming in like social security, you’re working by choice or rental income, and let’s just see how sustainable your investments are to fund your lifestyle. Now, the lawyers only let this say 99%. That’s the highest that it says, but the way we read this is to say that, over the course of your lifetime, you will be spending about $3.9 million in this sample. And at the end of your lifetime, we run our plan at stage 95; you will still have about $10 million left behind for the generations to come.

The way we solve for this over time is that we cast a wide range of possibilities into the future and tell you what the average result is. In fact, our systems cast a thousand different probabilities of where your portfolio goes for the rest of your life. You could have really, really great years for the rest of your life. You could have really, really bad years in the marketplace and everything in between. So you’ll notice this little graphic that has a thousand of these gray squiggly lines and we’re tracking every instance of those where some years go up and some years go down and we’re telling you of those thousand simulated environments, your portfolio is more than sustaining you in nearly every single one of them. Now you’ll notice these dial colors. There’s green, which is our sweet spot. That’s the Goldilocks zone, which is about 75 to 90%. In this mathematical modeling, a really healthy plan is at about 85 to 90%.

90% tends to be where you’re not quite spending as much as you could if you wanted to enjoy your assets. 90% is the point at which you may not be scratching the surface; you’re not even touching principal. You’re just spending the earnings that your portfolio is producing. This software would put that at about 90%. Then we can have some limits. So we first start with saying okay your plan is rock solid what’s the minimum return you need to get and we solve for that where we artificially just where we model it not in the real world we artificially decrease your returns to target an 85% score which is still very very healthy in this sample this client can afford their lifestyle, their basic spending at about 225,000 a year they can afford that with a minimum return of 2.2% 2% per year.

This gives our clients a lot of comfort knowing that if we can produce this from predictable dividends and interest, you never need to worry about what’s going on with the marketplace zigs and zags because you’re not held hostage to the whims of the market. You have predictable income that is meeting your minimum return. We hope to do better than that, of course, but this is nice to know where the floor is and how you meet that floor. And in this case, you’re still supporting the very same spending level, about 3.9 million, and you end up with about 2 million left at age 95. So still a healthy buffer at the end, but not quite the same size inheritance if you had a better return, such as the first scenario, which assumed a 6% return. Then we can test a couple of other limits, such as the most fun one. How much extra can you spend every year for the rest of your life and still be okay?

And in this, we’re able to look at the baseline spending, which is 225 and we can artificially ramp that up to $300,000 a year, accounting for extra taxes and inflation every year. And we can say that this client can spend an extra $75,000 every single year for the rest of their life and still be perfectly safe where at the end of their life they have on average about 4.6 million left over even though they’ve spent 5.5 million. And you might look at this and say, I don’t know how I’m going to spend an extra $75,000 a year. And I may not want to. Maybe I can give to family, or I can go on a nicer trip or travel or start that car collection. But if we wanted to translate this into total risk, we can then think of another layer to stress-test the finances. This is the max buffer, and this says how much you can afford to lose and still support your baseline spending.

In other words, if the market has a really big contraction or if you decide to make a really big purchase, how much can go out the door before you need to cut back on your spending? And this number informs us of how to protect against concentrated positions, such as if one holding had a really large percentage of your total savings, or inform really big purchases, such as helping family members, purchasing property, or maybe buying a second property for yourself. In this sample client, they can afford to spend or lose about 1.75 million, and they will not need to change their lifestyle spending one bit. They are still leaving behind about $3 million at the end of their lifetime, and you’ll see their total spending has gone up to about 5.6.

There’s a lot of other bells and whistles to this platform, but this is just a basic overview of how we track your assets, your liabilities, your income, your expenses, and then model out how safe your spending is relative to the assets that are working for you. And we can stress-test it to tell you your minimum return, your maximum annual spending capacity, and the total number of dollars you can afford to lose before you’re in hot water. We hope this was helpful. We appreciate you taking some time with us. Thanks.