Planning Philosophy of MoneyGuide Pro

Since 1999, MoneyGuidePro has been striving to change advisors’ expectations of financial planning software. We constantly seek to improve on our philosophy, which incorporates a hybrid of goal-based planning with cash flow after retirement. We believe that the industry’s assumption that software is either goal-based OR cash flow-based is a confusing and misleading way to view financial planning software. All financial planning software includes goals. The software may not refer to them as goals, expenses or outlays are more common terms, however, there are always fields for entering amounts of money clients will spend. In addition, all software produces results that include some level of annual cash flow. The real difference is in the level of detail within the assumptions and the granularity of the results. By convention, financial planning software incorporating the most detail has been referred to as “cash flow” software.

For many years, most advisors assumed “cash flow” software was more sophisticated and more accurate than goal-based software. Before MoneyGuidePro, that might have been the case. Since 1999, we’ve been demonstrating to advisors that including more detailed inputs and assumptions does not produce better plans. As a result, more and more advisors have embraced our planning philosophy.

Why MoneyGuidePro is Different

Many advisors create a detailed cash flow for their clients, and extend it many years into the future while making many assumptions -- predicting clients’ income for the next 20 years, estimating their expenses in each of those years, and making assumptions to estimate the taxes they’ll pay each year. The only thing we know for certain is that most of these assumptions will be inaccurate. No one can accurately predict that level of detail so many years into the future.

Next, let’s consider rates of return. In retirement, over a period of 30 to 40 years, small changes in rates of return can have a significant impact on a client’s plan. The best that we can do is to construct a portfolio and make some estimates in regards to how it will perform over time. If we predict an annual return of 8%, and the client receives an overall return close to 8%, we’re doing great. Instead, advisors often input every stock, every mutual fund, and every bond, and predict the return for each of these securities over 30 years including growth rates, dividend yields, tax treatment, tax rates, and other complex calculations. That’s a different level of detail. It actually makes the end result of the plan LESS meaningful because we’ve created even more assumptions, which will most likely prove to be inaccurate.

More data does not make a plan more accurate. More data, more assumptions, and more moving parts in a financial forecast don’t create more useful results. Think about a 30-year plan. We can assure you almost every assumption included will be inaccurate by the end of the plan. This doesn’t mean the assumptions are bad, or you should not make assumptions. It means we should make as few assumptions as possible. MoneyGuidePro focuses on the most significant factors. Since no one can guarantee the accuracy of any assumption, we limit the assumptions to those most reasonable to predict. With returns, for example, we believe using the long-term return on a portfolio, rebalanced annually is much more meaningful than trying to predict the performance of individual holdings. Focusing on clients’ savings and its relation to their current lifestyle is more reasonable than trying to predict their actual income and expenses for the next 30 years. Many people cannot budget for a year, or manage their life to a budget. It’s better to focus on what they save. Look at client’s income this year, and see what they’re saving and/or contributing to a 401(k) or IRA. Then, if the clients aren’t saving enough or don’t know how they’re spending their money, they may need to create a budget. The difference in MoneyGuidePro, is you didn’t start with the budget. In the words of one of our consultants, Harold Evensky, CFP®, “full cash flow accounting prior to retirement is actually ‘budgeting,’ and not everyone needs budgeting. For those clients who do need budgeting, it’s often not the place to begin the conversation.”

Financial planning is an ongoing process. We want to show clients a plan that is a range of possibilities and needs to be frequently updated. A plan helps clients make more appropriate decisions, because they have better information. When a client is focused only on short-term returns, they miss the big picture. If you can instead show them how a loss impacts a 30-year plan, the effect is dampened.

One of the worst things advisors have done is to focus clients on a quarterly statement of portfolio performance. When returns go down in a quarter or for a year, the clients see they have lost money. When discussing progress towards their goals with clients, it’s important to provide the context of a long-term plan, not to sell quarterly returns.

Introduction to Planning with MoneyGuidePro

There are five key elements in the MoneyGuidePro Planning Philosophy: (1) Begin with what’s most important to clients – their goals, (2) Prior to retirement, focus on savings and the goals to be funded from the investment portfolio, (3) During retirement, create many goals, separating necessary expenses from discretionary ones, (4) During retirement, show a cash flow of income and expenses (at the level reasonable for long-term planning), and (5) Make valid, supportable assumptions (again, at the level reasonable for long-term planning).

Pre-retirement – it’s all about the Portfolio

When working on your clients’ pre-retirement goals, it’s important to focus on the effect an event will have on the clients’ portfolio. Additions and returns increase the clients’ portfolio while expenses (goals) decrease a portfolio. Pre-retirement, only expenses paid from assets in the clients’ portfolio should be included as goals. Expenses, such as new cars and vacations, funded from the clients’ current income, don’t need to be input. Other expenses, like college costs, are often funded, at least partially, from investments, so those would be entered as financial goals. Savings towards these long-term goals will be entered as additions to the portfolio. Potential additional savings can be included if the client thinks they will be able to save even more.
Prior to retirement we use marginal federal and state tax rates, to calculate taxes on investment earnings. As with all other assumptions, while we default to the marginal rates, you can adjust rates, if you desire.

Retirement – Lifestyle Goals vs. Living Expenses

During retirement, we also begin with the clients’ goals. Once a client retires, all of their expenses will be funded from their Retirement Income and their investment portfolio. While you could create a single goal for Retirement expenses, we recommend you separate basic living expenses from “Lifestyle Goals,” which will account for discretionary expenses such as travel, gifts, and new cars. This will allow you to provide a more meaningful plan and more useful recommendations.

During retirement we implement a cash flow method for all income and expenses at the level meaningful in a long-term plan. MoneyGuidePro uses progressive federal and state taxes each year. MoneyGuidePro also provides four detailed retirement distribution reports, which can be viewed online or included in a printed report: Retirement Distribution Cash Flow Chart, Retirement Distribution Cash Flow Graphs, Cash Used to Fund Goals, and Sources of Income and Earnings.

In MoneyGuidePro, retirement income always begins at or after the recipient’s retirement. A retirement income is included in the calculations at the LATER of the “Begin Date” or the person’s retirement date. Income for an employed person that will be added to their investment portfolio should be entered either as an Other Asset or as an addition to an Investment Asset.

For married couples, MoneyGuidePro begins using progressive tax rates when the second person retires. This is the more conservative approach, keeping taxes at the marginal level until both persons are retired. If you think this is an overstatement of taxes, you can change the tax rates in the year the first person retires on the Tax and Inflation Options page.

Why MoneyGuidePro Is the Right Tool for Advisors

Some advisors assume higher net worth clients need detailed cash flow, and those with lower net worth (i.e., the middle market) need a simpler approach. We believe the detailed cash flow approach to long-term planning is invalid for either group. No one can possibly predict the detailed values of specific assumptions (e.g., property taxes, capital gains taxes, AMT, homeowner’s insurance, or deductions) over the next 20 to 40 years. Detailed cash flow is budgeting, not planning. It only makes sense to project a detailed budget for a few years. Assumptions change too often to project budget items for more than three to five years. For long-term planning, it is much more important to make reasonable, supportable, aggregate assumptions.

Experience shows us that a clients’ net worth does not drive the need for budgeting. Clients who are not saving enough to meet their goals need budgeting help. The need for budgeting is not correlated with net worth; it’s correlated with big expenses, or projected expenses, relative to income, and not enough savings. In fact, it can be argued from a philosophical perspective, clients with a low net worth actually need better planning because they have a smaller margin for error. Our core belief is that everyone needs and deserves a high quality financial plan.

Why Clients Respond to MoneyGuidePro

What Are Your Goals?

Clients' financial goals are important. They are not merely "expenses", they are hopes and dreams. In MoneyGuidePro, we begin with clients' goals, time frames, amounts, and importance. This engages the client and allows them to focus on how their money can be used to fulfill their needs, wants, and wishes. We’ve transformed a data-collection process into a conversation about what’s important to the client. Financial planning does not have to be like a session in the dentist’s chair, it can actually be fun.

The Client Portal, fillable Data Gathering Forms, or a MyMoneyGuide Lab can provide guided, step-by-step process for creating goals clients can use online, by themselves, at a time of their choosing. They can spend as much, or as little, time as they want defining their goals and determining their preferences.

What Do These Results Mean?

A Plan is not effective if clients don’t understand or are overwhelmed by the presentation of their results. Clients are less likely to take the necessary actions to implement the recommendations in a Plan if the results are unclear or confusing. MoneyGuidePro doesn’t stop with a presentation of clients’ results; we also explain the results in straightforward, uncomplicated language.

MoneyGuidePro results are never Pass/Fail. Many other programs spend the clients’ money until it runs out, and then say the Plan failed. MoneyGuidePro never says the clients’ Plan failed. Rather, it shows an estimated funding percentage for each goal. To help clients get on track, advisors add the appropriate action items, in their own words, for each client Presentation.

I’ll Understand This Better If I Do It Myself

The Client Portal feature of MoneyGuidePro allows advisors to work collaboratively with clients, either in real-time or independently. Advisors and clients can work collaboratively by reviewing and modifying plans simultaneously, each from their own computer. Clients also have the option to review/edit their Plan at their convenience using their Client Portal access. This feature saves advisors’ time, because it allows their clients to enter much of their information themselves. Another benefit is that clients often feel more ownership in a plan they have helped create.

Some advisors allow their clients to experiment with different assumptions in Play Zone®. You can enhance your clients’ understanding of how different assumptions affect their results by allowing them to take a hands-on approach using Play Zone. In Play Zone clients can change key inputs and immediately see the results change, allowing them to grasp the impact of those variables. This helps them understand which variables have the biggest impact on their plan.

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