The purpose of a financial checkup is to help assess whether a client’s desired lifestyle is likely to be affordable under current or changing circumstances.  That lifestyle may be pre- or post-retirement, or both.  Affordability is based on current/retirement income, assets such as savings and investments, liabilities such as a mortgage, and household expenses.  A checkup is most needed when finances are about to change due to retirement, a lower-paying or gig job, and/or significant new expenses – private school, college, new home, etc.  As with much in life, preparation is the key – in this case, to a checkup that is comprehensive and produces results that support a lifestyle goal or that are actionable if changes are indicated.

For the following discussion, references will be made to a sheet of input templates.  They capture the four main areas for client-provided information:  (1) Background, Income, and Retirement; (2) Assets; (3) Expenses; and (4) Liabilities.

The first tab in the linked spreadsheet begins with basic information about the client(s) – names, ages, years to retirement, tax filing status, and state of residence – and can be used for individuals or couples.  The yellow boxes – here and on the other tabs – require responses.  The state of residence is especially important for determining the state tax rate on retirement distributions – IRAs, Pensions, Social Security.  A number of states do not tax some or all of those incomes, a fact which may become an important consideration for retirees.  Income is more than just the current salary, wages, and bonus (if known).  Here we include contributions to retirement IRAs, 401(k)s/403(b)s, deferred annuities, etc., all of which are deferred income, as well as projected Social Security Income (SSI) and Pension payments, especially for those clients nearing retirement.  It is important to note that clients may wish to defer receiving Social Security until age 70 to maximize their monthly payments unless there is a clear need for earlier income.  Those benefit levels should also be indicated.  The checkup can analyze the effects of both scenarios.  Clients should have established accounts with the Social Security Administration at ssa.gov which will allow them to view their current estimated SSI benefits at different ages. 

The second tab – Assets – in the linked sheet is used to enter the client’s assets, including bank accounts (cash), investments, a home, and the cash value of whole life insurance policies.  Investments include stocks, mutual funds, bonds/fixed income funds, hedge funds, real estate other than a primary home, private partnerships, and non-public company shares, etc.  Retirement accounts – IRAs and 401(k)s – are included.  Clients need only summarize their investments by major category since projecting the future performance of investments will be based on general assumptions of returns by asset class – equities, fixed income, real estate, etc.  The tax basis for all investments and any tax loss carryforwards from prior years should be included for the most accurate projections of future after-tax cash flows.

Expenses are on the third tab of the template worksheet.  Before we proceed, though, it should be noted that while a financial checkup may be the first time some clients actually quantify the household budget they have been funding without much forethought, others may have an accurate overall grasp of the family’s yearly expenses, whether in their heads or because they keep careful accounts, possibly using a QuickBooks or similar tool.  For those in the latter group, the expense tab can be used to enter just a few summary figures, in addition to future expenses as discussed below, and the detailed line items can be largely ignored.  For the former group, it can be eye-opening to realize just how much is being spent on certain items, e.g., vacations, takeout, tennis lessons, or the beauty parlor!  And how about all those new clothes every year?  When it comes to expenses, preparing for a checkup is akin to setting a household budget, except you start by looking in the rearview mirror at what has been (and still is).  Then you determine what expenses you know will change or commence, when they will do so, and for how long.  These would normally be items such as private school/college tuition, a new house or car, a wedding, etc.  They would also include the “empty nest discount”, or the general drop in a number of expenses – food, clothing, utilities – as the last child leaves home.  The Expenses tab contains a fairly comprehensive list of the types of living costs for which we would expect a client to provide detailed accountings.  Note the use of columns to indicate, for each expense, when it begins and how long it lasts.  Most expenses are ongoing, starting at year 1 and running the duration of the analysis.  These columns are especially helpful for timing those items with a finite duration – private school, college, etc. – and perhaps, a future starting date as well.  (See Private School and College Education in particular.)  This effort often requires some of the most tedious work of the checkup, unless you are in that other group above, as clients need to refer to past credit card statements, utility bills, online e-checking histories, etc.

Liabilities are listed on the last tab of the linked sheet.  They would typically include home mortgages (primary, secondary, etc.), car loan(s), and home equity lines.  The necessary inputs per loan would be the current loan principal amount, number of years remaining, rate, monthly payment and, in the case of homes, property taxes.

The client having furnished the above information, we are ready for the real number-crunching analysis and projections of future financial states a client might expect over the chosen time horizon – years to decades – under given sets of economic assumptions regarding inflation, investment returns, retirement payments, etc.  This step in the financial checkup will be discussed in the following article.