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Lifetime Income Planner:
Income Assumptions - Life Planning Method
Too often financial plans use faulty income assumptions. Assuming that household income is fixed or increasing throughout work-life can lead to wreckage in financial plans. There are many reasons that income may fluctuate over time, some planned and some surprises.
Use the Lifetime Income Planner, to see how valuable it is to develop income assumptions based on your unique life plan. While doing the exercise, keep it simple. (1) Consider your unique values and priorities. What life events do you forecast in your future? (2) How much household income do you project during each stage of your life? (3) What do you need to budget for a sustainable Valuable Daily Life?
The last column of the worksheet provides a calculation of after tax residual income for savings and investments. Or, if it's a negative number, it indicates shortage for which you may want to plan.
Resist temptations to read more into this exercise than intended. Use only todays dollars. And, don't jump ahead to investing and wealth building. Instead, focus on a sustainable Valuable Daily Life that can be maintained even through times of change.
Here are three real life examples to demonstrate the use of this method:
Case 1: A two income couple in their mid twenties were making great combined incomes and trying to determine what they should do about their housing options. Although they were both working full time they wanted to plan for one full-time and one part-time income. One partner enjoyed being on a career track and the other partner had no corporate career aspirations. They both agreed that their personal life was more satisfying with the non-career oriented partner happily pursuing other interests. For this young couple, considering their priorities and foreseeable life plan helped create a baseline for making a meaningful and sustainable financial plan, staying out of debt, living well below their current two incomes, and saving (they wanted to take one nice trip/adventure each year).
|
Life Planning Events |
Type of Work |
Age Range (Annual Increments) |
Average Annual Household Income |
Valuable Daily Life Monthly Budget |
% of Income Taxes |
Savings and Deficits Available For Lifetime Cash Flow |
|
Married, apartment living, wife working full time, husband working 1/2 time, travel 2 short trips, 1 major trip a year. |
Mid management, part-time clerk |
25 |
to |
35 |
$75,000 |
$2,500 |
32% |
$210,000 |
|
Wife moves up in career, husband continues part time, purchase a home perhaps one child |
Salaried Professional |
36 |
to |
50 |
$90,000 |
$4,000 |
35% |
$147,000 |
|
Wife moves up in career, husband continues part time, more travel, maybe college expenses for child |
Increased Salary |
51 |
to |
65 |
$105,000 |
$5,000 |
36% |
$100,800 |
|
Both partners work part time, preparing for retirement |
2 part-time incomes |
66 |
to |
70 |
$60,000 |
$5,000 |
36% |
($86,400) |
|
Social Security income, Full Retirement, Paid off Mortgage, Travel |
Retired |
70 |
to |
90 |
$25,000 |
$4,000 |
25% |
($585,000) |
|
Total Savings or Deficient (No Time Values - Simple Dollars) |
($213,600) |
Case 2: A couple just entering their 50s needed to make some changes in their financial plan. The husbands career in business management was winding down and he was unsure he could count on full employment in the same low growth industry. He was interested in work as an administrator in housing for the senior community, a growth industry. The wife was willing to go back to work and the husband wanted to secure a graduate degree as part of his mid-life career plan. They did the life income exercise and made the financial plan outlined below.
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Life Planning Events |
Type of Work |
Age Range (Annual Increments) |
Annual Household Income |
Valuable Daily Life Monthly Budget |
% of Income Taxes |
Savings and Deficits Available For Lifetime Cash Flow |
|
Current Career, Married, Two Children, One out of house, One in College ($10K a year for two more years), 15 years left on mortgage. Currently well funded retirement and $50K in reserves. Planned to accumulate an additional $20,000 in reserve. Wife enters workforce. |
Management, Wife Part-time |
50 |
to |
52 |
$100,000 |
$4,500 |
36% |
$20,000 |
|
Graduate School ($30,000 expense), Husband works part-time and Wife works fulltime. Children finished with college. |
Husband - Part-time in related field. Wife full time mid level clerk |
53 |
to |
55 |
$45,000 |
$4,000 |
30% |
($33,000) |
|
Husband begins new career, full-time, wife continues to work full time. |
Increased Salary |
56 |
to |
65 |
$70,000 |
$4,500 |
30% |
($45,000) |
|
Wife Retires, husband continues to work, Mortgage and all debt paid off. |
Single Income |
66 |
to |
70 |
$70,000 |
$4,000 |
30% |
$4,000 |
|
Full Retirement, Some Travel |
Retirement |
71 |
to |
90 |
$30,000 |
$4,500 |
30% |
($627,000) |
|
Total Savings or Deficient (No Time Values - Simple Dollars) |
($681,000) |
Case 3: A divorced 48 year old woman, with parents in declining health, was concerned about getting fired. Income life planning made it clear that she could not afford to sustain her current financial commitments if she lost her job. She created a plan that made it possible care for her parents and provide some security for herself. She sold her house and diverted a large portion of the proceeds to her retirement savings plan. She moved in with her parents making an agreement that they would pay all household expenses and provide her a $1,000 stipend for personal spending. She then enrolled in an online university and began earning her bachelors degree for personal fulfillment and to prepare her in case she had to return to the workforce. Her father was in rapidly declining health and she thought her mom may live another 10 years.
|
Life Planning Events |
Type of Work |
Age Range (Annual Increments) |
Annual Household Income |
Valuable Daily Life Monthly Budget |
% of Income Taxes |
Savings and Deficits Available For Lifetime Cash Flow |
|
Single divorced woman, two grown children, primary residence had become a burden ($75K in equity), Parents requiring daily assistance, own their home. |
Hourly Employee |
48 |
to |
49 |
$33,000 |
$2,200 |
15% |
$1,650 |
|
Sell house, move in with parents, parents cover room and board and give client $1,000 a month. Client uses up to $25,000 from sale of house for education. |
Full Time Care Giver and Online Student |
50 |
to |
60 |
$12,000 |
$700 |
5% |
$30,000 |
|
Back to workforce, Apartment living or remain in parents house. |
Part-time work |
61 |
to |
70 |
$25,000 |
$2,500 |
15% |
($78,750) |
|
Retirement, life style pretty much the same as pre-retirement |
Retirement |
70 |
to |
85 |
$12,000 |
$2,500 |
10% |
($288,000) |
|
Total Savings or Deficient Over Period (No Time Values - Simple Dollars) |
($335,100) |
Now it’s your turn to give this exercise a try: Have fun with this !
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