What is Scenario Development?

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The most profound contribution financial planning can make to life planning is in the creation of financial scenarios to support the client’s review of what approach makes sense for developing a life change agenda. It is here that a number of possible scenarios, or life paths and contemplated decisions can be tested for their financial feasibility. Technology has made it easy for us to simplify the complex areas of financial planning. With the help of high-speed computers and sophisticated integrated software programs, we can convert the components that make up a strategic financial plan into an easily understood single concept: Cash.

Investments    Aside from the liquidity aspects of investments (how fast they can be sold for cash), investments are cash, they grow to produce more cash, and they may pay interest or dividends in cash.

Taxes    Taxes reduce cash and proactive planning strategies can mitigate this reduction.

Estate Planning    Estate planning is about the net property valued in cash being distributed at death with the objective of increasing amounts going to heirs  (bequests), and possibly charities, and controlling the amount going to the government (estate taxes) and termination costs

(probate fees, trust administration, etc.)

Insurance Planning    Insurance planning (life and disability) is concerned with calculating the amount of cash needed to fulfill an individual’s responsibilities, needs, and desired legacy in the event of death or disability of a breadwinner or caretaker.

Retirement Planning    Retirement planning is projecting the amount of cash that will be available to spend after income-producing activities slow or terminate. Will the amount last beyond life expectancy or fall short, requiring a reduction in current spending, increase in savings, or revision of retirement date?

Education Planning    Education planning is the computation of cash required today or to be deposited over the next number of years to fund a future payment for educational expenses.

Charitable Planning    Charitable planning is the calculation of cash left over after projecting cash requirements for financial independence and a desired family legacy.

After converting all of the above to cash, financial scenarios can be developed to help you determine the feasible paths to your dreams.

Can You Give Me an Example of Scenario Development?

Suppose that you are age 55 and have accumulated a net worth of over $3 million from a life of hard work. Your children have all graduated from college, have jobs, and are no longer dependent on you. You want to explore some of the possible opportunities available for the rest of your life.

After a few coaching meetings with a financial life planner you remember that you always wanted to teach law. However, you never thought you could afford to do it because it only paid about ⅓ of your current income, and that would not have been enough to support your family’s goals when they were younger.

Your wife always hoped that you would stop working a little earlier in life. When you first met you spent summers in Europe and she would like to return to that lifestyle. You mentioned to your advisor that if you could afford it, you’ve always wanted to help families with disabled children that were not as fortunate as you and your family.

Your advisor runs these scenarios for you to consider with the following results:

Scenario 1: Continue working in your current career until age 65.

Result: Leave an estate worth over $20 million to your children and charities.

Scenario 2: Stop current career and take a teaching position.

Result:    Leave an estate worth over $10 million to your children and charities.

Scenario 3: Same as Scenario 2, but spend summers in Europe.

Result: Leave an estate worth over $5 million to your children and charities.

Scenario 4: Same as Scenario 3, but give all your excess funds to charity while you are alive.

Result: Spend all your net worth in your lifetime.

Discussing the potential financial outcomes of these alternatives can help you proactively refine what you value most at this stage in your life, and help you choose a path with passion and confidence.  It will also expand your thinking to new possibilities that you may have never considered.