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Posted on OCT 26, 2018

What is a Financial Plan?

By Robert L. Warner, Managing Director – The Pilot Program, Johnson Financial Group
This article is part of a continuing series of articles about retirement planning.

The financial landscape for pilots has changed over the past few years, requiring a new and focused process for you to meet your retirement planning goals. Pilots have to realize that they need to take a more active role in their financial planning, but it requires time, knowledge, expertise and confidence. Many have thus turned to outside guidance to help them with the complexity.

During my frequent meetings with active pilots, I often ask how many of them have a financial plan. Generally about 75% share that they have one. Then I probe a little further as to their definition of a financial plan. For some, a financial plan is their 401(k) plan and how they are allocating those assets. For others it is their budget or auto bill payment process. There are many definitions.

The type of financial plan we refer to is more robust than that. We have implemented a seven step approach with our clients that you can follow to create your pre‐retirement financial plan.

Seven Steps to Creating a Pilot Pre‐Retirement Financial Plan

  1. Define your values, objectives and goals for retirement.
  2. Understand your company's benefits: post‐retirement healthcare and pension options.
  3. Account for all your sources of retirement income: company plans, IRAs, military, etc.
  4. Determine when to take Social Security to maximize your benefit.
  5. Organize your money: how much to save, when and how to pay down debt, investment choices, risk tolerance, etc.
  6. Know your estate planning options: beneficiaries, wills, trusts, estate taxes, etc.
  7. Create a retirement financial and spending plan that reflects all of the key information gathered in steps 1‐6.

I often get asked, “When should I start my pre‐retirement financial plan?” The simple answer is the sooner the better. I usually begin working with pilots in their late 40s and early 50s. They have focused on savings accumulation and now want to start preparing for their retirement at 65 or before.

Steps 2 – 5

Steps two through five require making decisions based on the choices offered and, where possible, taking advantage of the flexibility available. When I work with a pilot making these decisions we take a look at all the scenarios and try to maximize their decisions based on their lifestyle desires and personal situation. We work together to answer the following:

  • Which pension distribution option is best for me?
  • When should I take Social Security to maximize my benefit?
  • How should I handle post‐retirement healthcare?
  • When and how should I pay down debt?

Since 1997, we've seen a variety of scenarios in our work with pilots .This experience has helped us guide our clients to an appropriate decision for their given situation. Probably more challenging and important for most is Step 1.

Step 1

Of the six steps, number 1 is the most important. It is the blueprint. First and foremost is your ability to identify your values, objectives, goals and priorities. By setting goals and objectives we are able to build a financial plan and measure progress against the plan. But most of all, we work to understand your dreams.

Defining Your Dreams

The best part about Step 1 is that it's all about dreams. Here we get to play “what if” scenarios. There is no right or wrong answer. I find that by probing on personal values, the dreams take form. Do you want to spend time with family in retirement? Or is having all the best toys or a getaway place the priority? I work with pilots to define their dreams, and then we put a plan in place to achieve them.

Stress Testing Dreams

Once we define values and goals, we run a number of scenarios on our ClearWealth® Pre‐Retirement Program to stress test, or identify the likely success or failure of the various scenarios. Running the scenarios helps people evaluate what is really important to them. Stress testing helps us determine the likelihood your dreams can be achieved in various market conditions. It also helps you understand the impact of spending and investing decisions. For example how will a million dollar retirement home versus a $500,000 one impact your retirement income stream? How are your other goals impacted by this decision? The planning process helps you control what you spend and save while taking into account and measuring the uncertainty of the markets. The ultimate goal of the planning process is to design the one life you have to live in the best way you can, without taking unnecessary market risk or sacrificing lifestyle.

Making Your Dreams a Statistical Reality

Without a pre‐retirement financial plan pilots often don't know when they can retire. They may pick a retirement age based on what their peers did, or Social Security income or their mandatory retirement age. We recommend a different approach starting with defining your dreams and then creating the lifestyle you want and taking advantage of the tools and technology we offer to make those dreams a reality. It's a shame to be afraid you will run out of money in retirement. It is also a shame to die with a mattress stuffed with cash without fulfilling your dreams. You don't want to look back and say, I wish we had taken that trip as a family or lived in the lake house we wanted.

Our ClearWealth Pre‐Retirement Program utilizes sophisticated planning software which assigns a probability of success to every plan. We can enter all the decisions we arrived at together and get clear answers regarding the plan's likely success. The program will give you a probability of success for each scenario. For example, the program may project you will have a 90% chance of achieving your goals and objectives. The process then allows you to move “levers,” make different decisions and see what the probability of attaining those goals will be. Overall we want to make sure your financial plan is in the 75%–90% probability range. Less than 75% is too uncertain. You can achieve higher odds by working longer, saving more or making different life style choices.

Facts + Stats = Peace of Mind

In one of my conversations with a pilot client, he was concerned because a condominium he bought lost value and the overall market was down. As a result, he thought he had to make some dramatic changes to his lifestyle and/or his portfolio. First, we took a look at his probability of achieving his goals and having adequate retirement income from our last portfolio update. At that time he had an 86% chance of success. We took a fresh look at his portfolio given the real estate loss and market dip. Even with the market drop and his condo devaluation, our program indicated he was at an 82% probability of success. This gave him great peace of mind. It also prevented him from taking any drastic actions in either his portfolio or lifestyle. He was comfortable at an 82% chance of success and did not feel the need to make any changes. Of course we will work with him to continue to monitor his goals.

The Goal: Achieving Comfort and Confidence

The bottom line is that a solid financial plan will give you comfort and confidence. It helps you gauge the likelihood of achieving your goals and objectives and delivers a good level of comfort. It guides you in making trade‐off decisions. For example, while you might be more comfortable with a retirement income of $150,000, you may not be confident you can leave your desired legacy to your children. However, if you can still live comfortably on $120,000 a year, you could feel more confident in your ability to provide for your heirs.

Once I work with a client to identify life goals and objectives, we can prioritize them, create a plan and find an investment portfolio to best meet their needs. The investment decisions reflect their financial plan and are a means to meet their dreams.

We think a financial plan should let you set life goals, then monitor and measure those goals. This type of plan will take on real meaning in your life.

Benefits of a Financial Plan

  1. Helps achieve goals otherwise ignored. You are planning on retiring at 65. If you could retire at 62, would you? I work with pilots to build a plan to see if this option is feasible.
  2. Helps avoid unnecessary risk. Recently I worked with a pilot who was an excellent saver and had 90% of his portfolio in stocks. When we ran his goals through our ClearWealth Pre‐Retirement Program it indicated that in order to achieve his goals he only had to have 40% of his assets in stocks. Why take on additional market risk if you don't need to? If you are meeting your goals, you may not need to take on additional risk. A financial plan helps you avoid unnecessary investment risk.
  3. Ongoing monitoring. Our ClearWealth Program helps recalibrate the plan as we monitor. Typically we review the overall plan with our clients annually. But if there is a large movement in probability, say 85% to 74%, we can catch it and immediately discuss it. A financial plan helps identify problems (and opportunities) early and in advance so we can be proactive and take action if needed.
  4. Helps you develop confidence that your goals can be achieved. With a well‐thought out, stress‐tested, prioritized financial plan you can find the balance you need between comfort and confidence which usually results in peace of mind and the retirement of your dreams.
Robert Warner
Robert L. Warner is Managing Director, The Pilot Program, Johnson Financial Group and EVP Johnson Wealth, a Johnson Financial Group Company. He is also a Chartered Financial Consultant (ChFC®). He has over 25 years' experience helping clients, including active pilots and their families achieve their retirement and estate planning goals with an emphasis on estate conservation and wealth transfer planning.

Johnson Financial Group and its subsidiaries do not provide tax advice. Please consult your tax advisor with respect to your personal situation. Wealth management services are provided through Johnson Bank and Johnson Wealth Inc., Johnson Financial Group companies. Additional information about Johnson Wealth Inc., a registered investment adviser, and its investment adviser representatives is available at https://www.adviserinfo.sec.gov/. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE