The following blog is written for the client. A resource to help explain what an Integrated Benefit Analysis is and why they need it from their advisor.
A few years ago, I played a New Year’s Eve game with a group of friends. We were divided into small teams and each given a box with a puzzle in it. We raced to see who could finish putting each puzzle together first. What we did not know was that one group had the wrong box for the puzzle, and another group had the pieces missing from theirs. The group that had the right puzzle box won and the rest of us were quite frustrated. Not surprisingly, having a picture of how things fit together really helps us solve problems.
Retirement planning can be similar: We have different sources of income for retirement, but we are not quite sure how they go together. Public school teachers often have a pension plan, may or may not have Social Security, and may have some savings in a 403(b), IRA, and/or a 401(k). But the real question is: How do these pieces fit together? In some respects, this is similar to the puzzle game—but it is not a game. Getting this wrong can create substantial problems in the future.
AN INTEGRATED BENEFIT ANALYSIS: THREE ADVANTAGES
A snapshot of how your retirement assets work together is called an integrated benefit analysis. Your advisor needs to provide you with this key. It allows you to understand how your various retirement assets (the pieces of the puzzle) work together to help you achieve your desired retirement. With the right picture, you are no longer looking at each retirement account independently. Rather, you see how your pension plan, Social Security, 403(b), and other retirement assets fit together to deliver the retirement you are looking forward to.
An integrated benefit analysis provides three key benefits, which we describe below.
Benefit #1: A Clear Understanding of Retirement and a Roadmap for Getting There
An integrated benefit analysis provides a clear picture of what retirement looks like for you and a roadmap of where you are going. Hopefully this provides a level of comfort, helping you realize you are well prepared for retirement. However, for some, it may provide a stark picture of something you are not well prepared for. In either scenario, or if you are somewhere in between the two extremes, you now have a realistic image of what your retirement looks like.
Benefit #2: An Opportunity to Ask Informed Questions
The second advantage of an integrated benefit analysis is that it allows you to start asking informed questions about what changes you need to make for a successful retirement. For those who are well funded, it may mean retiring earlier than anticipated, having a higher retirement income, or being more generous with your favorite charities. For those who are facing a more challenging situation, the good news is that you can make the right decisions today to achieve a better outcome in the future.
When you review an integrated benefit analysis with your advisor, understand that you—not the advisor—are the decision maker. The decisions you make are personal, and your values are key in how you make decisions. No matter what your retirement picture looks like, the advisor should ask, “What would you like to change?” Be aware that some advisors haven’t been trained to ask you this question. In that case, be proactive and ask, “Do you mind if I change some of the assumptions made in this illustration?” The key here is that you are in the driver’s seat.
If you do not have enough resources for retirement, you have options other than just saving more: You could work longer, work part time for part of your retirement, invest at a higher rate of return (and higher risk), live on less income, sell assets, and more. The decisions are yours. These decisions can have a large impact on your future and how your retirement will be lived. That’s why you must be fully engaged in the decision-making process.
If you’re not sure what to change, don’t be afraid to ask your advisor about your options and his/her opinion. Your advisor can be a great resource and may suggest solutions that weren’t initially apparent to you.
Whatever changes you are considering, your advisor should be able to alter the illustration immediately to show you the impact of those changes. You should be able to see how more than one change affects your retirement picture and be able to alter the illustration in different ways to better understand your situation.
Benefit #3: An Opportunity to Assess Your Progress
The third benefit of an integrated benefit analysis is that, down the road, it allows you to assess your progress in moving toward retirement. In the years to come, you will be able to see how the adjustments you made have impacted your retirement picture. You will gain a sense of progress and confirmation that you have made the best decisions for yourself as you move forward to retirement.
For all these reasons, knowing how retirement assets fit together in an integrated benefit analysis is crucial to understanding what your retirement looks like. It provides the foundation for making informed decisions for retirement planning and the ability to see how changes affect your retirement picture. Finally, in the future, it allows you to see the progress you have made, knowing you have worked hard to prepare yourself for a secure retirement.