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from Lonier Financial Advisory LLC, Osprey, FL

Lifetime Planning with R-MAP Planner

Lifetime Planning with R-MAP Planner

I’ve been busy the last few months enhancing the planning tool I’ve developed, R-Map Planner, and building a home for it on the web where planners and civilians alike can find out about it and license it. So I’ve been a bit absent here from posts recently (no cheering!), part of the time division that comes from being a one-man band, even one assisted by massive quantities of technology.

The R-Map project started a couple years ago because none of the tools available in the trade use lifecycle financial planning—what I call “Lifetime” planning—as the underlying method for analyzing household finances and creating a long-term financial plan.

That’s not too surprising since most planners and advisers don’t use the lifecycle method. It’s too time consuming, requires too much involvement with the client’s whole financial situation (ie, it’s ‘holistic’), and, well, frankly, it’s too hard to make (much) money spending so much time with clients when you can make 2-3% just putting people into ‘recommended’ proprietary financial product solutions.

Lifecycle finance is based on academic research* that looks at a person’s or household’s entire lifespan, from first jobs and early savings, raising a family and building a lifestyle in mid-career, saving for major goals like college and retirement, to transitioning from a busy career to senior status, where earnings no longer support the lifestyle. In short, if you’re going to have x amount of income during your entire life, and y amount of expenses, they need to add up.

The more you can smooth out the income and expense peaks and valleys over time, the less travail, the more productive you will be, and the less time and angst you will spend on finances. To do this you need to account for human and social capital as well as financial (investment) capital, and build a household balance sheet that includes the present and future value of all three kinds of capital and all future liabilities while accounting for a lifetime of various risks.

The household balance sheet provides the basis for setting achievable goals, determining required savings, and managing a lifetime of risks through allocating all three kinds of capital to upside/floor/longevity/reserves (**see note re RIIA-USA.org, the industry association that developed the RMA method, below). This is the essence of a lifetime financial plan.

That’s a completely different kind of allocation than you will hear from most advisers who talk stocks/bonds/cash. That’s because it’s the result of a completely different process than picking stocks and trying to time the stock market to maximize returns. Since Wall Street spends millions of dollars marketing that message every day, it’s not surprising that many are not aware of the lifecycle alternative.

An investment-centric approach is safest if you are well-off and can afford the risk. That’s the ‘upside’ part of the allocation. But not so much if you’re just trying to max your 401(k) and your upside is a cup of coffee and a sunny day. So how much should you put to upside? How best to plan? How do you figure this out?

So back to my story about R-MAP.

Before I started building R-MAP, I found a few tools that used ‘goals-based’ planning, which is similar to lifecycle planning, but even those are investment-centric. None embraced and integrated a broad range of techniques for funding goals and lifetime planning. And none of them looked at the balance sheet and the impact of human and social capital on lifetime financial planning.

So I started building my own tool. Now a couple years and a hundred or so development versions later, and through a half-dozen released versions, R-MAP has evolved into a comprehensive tool for planning a 75-year lifetime.

It automatically creates a current year and at-retirement household balance sheet, and uses that balance sheet to allocate upside/floor/longevity/reserves. It sets up and monitors a passively managed low-cost global market upside/at-risk floor portfolio of stock and bond index funds that is allocated to floor and upside from the balance sheet, not from arbitrary formulas or changing feelings about risk tolerance.

It has a tool for creating fixed floor from ladders of CDs, TIPS, zeros, and regular bonds, and longevity from simple income annuities. It has a method for calculating reserves based on household risk exposures. It has a worksheet for studying the effect of various Social Security claiming strategies on the balance sheet and lifetime year-by-year cash flow. It can model the effect of ‘plan B’ home equity cash-outs and other asset sales. It shows the year-by-year impact of taxes on various tactical moves and changes in the plan.

Unlike other tools which are usually black boxes, since it’s based on Excel, R-MAP is transparent. You can always see where the number comes from and change it if it should be changed. You can add stuff, to account for unique circumstances.

In short, it’s a versatile, powerful tool for doing lifetime financial planning—for setting a course and keeping on track. And for me, an important by-product of building the tool is that I have come to a fuller understanding of the full lifecycle planning method. Win-win—a tool up to the task, and planner better able to use a powerful tool!

There’s still plenty to improve, future releases, new features, and so forth. But my time division is opening up a bit, so I’m back here. And will also be blogging about how to use R-MAP over at www.rmap-planner.com as well.

Meanwhile, send me an email if I can be of service!

—Michael Lonier, RMA℠

 

**You can find out more about the lifecycle planning method, which has been developed from lifecycle finance principles by the Retirement Income Industry Association, on the RIIA-USA.org website and in the RMA Curriculum Book available at Amazon (disclosure—I am among the contributors to the book).

*If you lookup “lifecycle finance” in Wikipedia, you’ll get Paul Samuelson, who was a professor at MIT and the first American to win the Nobel for economics and his MIT colleague and fellow Nobel laureate Robert C. Merton. See also books by Zvi Bodie and Laurence Kotlikoff, economics professors at Boston U. and Moshe Milevsky, a professor at York University.

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