Where You Are

The man pursues a great variety of goals, but the one he seeks as his ultimate end is happiness. Everything else is a means not an end.
— Socrates

Financial planning is intended to chart a course from your current financial reality to your hoped for future financial condition. In other words, just like taking a car trip, your route depends on both your destination and your starting point. However, unlike a road trip where the GPS can tell us within a few meters our current location, our current financial position is often less certain.

In order to identify our client's starting points we help them prepare two items: a balance sheet and a present cash flow. The balance sheet summarizes a family's assets and liabilities. Assets can be viewed as potential sources of future income while liabilities are claims against that future income. For example, a family's house might be available to fund retirement income through a reverse mortgage. But, any existing traditional mortgages reduce the value of the house that can be unlocked to provide retirement income.

The present cash flow summary helps us understand the family's current standard of living. This is important because it often represents a baseline for retirement spending. In addition, the present cash flow summary provides an estimate of the amounts that a family can be reasonably expected to add to the assets on its balance sheet.

the measurement of success should be income. Income is how one determines their desired standard of living. You don’t need a principal sum to live. You need a certain level of inflation-adjusted income.
— Robert Merton, Nobel Laureate Economics

Where You Are Going

Where you're going in your financial life can often be reduced to a number but that number really represents its own goal. For example, your retirement portfolio number is the amount that can be converted to an inflation adjusted income that you cannot be outlived (see The Four Questions of Life). Is a $250,000 retirement account enough to satisfy your lifetime income? Or, do you need a $1,000,000 retirement account? Every family has a different amount.

Why Portfolios Fail to meet your plan

Often people mistake the portfolio for the plan, but the portfolio is not your plan. However, since your portfolio is the engine for your plan, it's important to understand what can cause portfolio induced plan failure. So, why do portfolios fail (and therefore cause plans to fail)?

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