Can John Retire Early? Determining Savings Sufficiency with MPS: A Case Study

Can John Retire Early? Determining Savings Sufficiency with MPS: A Case Study

Executive Summary

For RIAs seeking to provide comprehensive retirement planning, accurately predicting a client's savings behavior after a significant income change is crucial. Golden Door Asset’s MPS Calculator enabled John, a 55-year-old tech executive considering early retirement, to understand how his savings rate would be impacted by a projected $375,000 income reduction, ultimately allowing him to optimize his retirement plan and potentially increase his nest egg by $150,000. This case study highlights how AI-powered tools can provide precise financial insights, enhancing client service and fostering long-term financial security.

The Challenge

In today's rapidly evolving financial landscape, Registered Investment Advisors (RIAs) face increasing pressure to deliver personalized and sophisticated financial planning solutions. According to a recent Cerulli Associates report, the average RIA serves approximately 150 clients, and each client demands a tailored approach to wealth management. One of the most significant challenges RIAs encounter is helping clients navigate major life transitions, such as early retirement, which often involves significant changes in income and spending habits. As fee compression continues to impact the industry, with average advisory fees hovering around 1% of AUM, RIAs need to leverage technology to improve efficiency and provide greater value to their clients.

Specifically, predicting a client's savings behavior after a significant shift in income is notoriously difficult. Traditional retirement planning tools often rely on static assumptions and fail to account for the dynamic relationship between income, savings, and consumption. This can leave clients like John, a 55-year-old tech executive, unsure if their current savings rate is sufficient to maintain their desired lifestyle throughout retirement. He is contemplating an early retirement but faces a steep income drop from $450,000 annually to $75,000 from consulting. This substantial shift raised a critical question: would his existing savings rate be adequate, or would he risk outliving his assets?

The cost of inaction in these scenarios can be substantial. Without a clear understanding of how reduced income will impact savings, clients may make premature retirement decisions, leading to depleted savings and financial hardship later in life. Conversely, they might unnecessarily delay retirement, missing out on valuable years of leisure and personal pursuits. The inability to accurately predict savings behavior can also erode client trust and satisfaction, potentially leading to attrition and negative word-of-mouth referrals – a significant concern, as studies show that client referrals are a primary driver of growth for RIAs.

Our Approach

Golden Door Asset’s MPS (Marginal Propensity to Save) Calculator provides a powerful solution for RIAs to address the challenge of predicting savings behavior after significant income changes. The tool works by calculating the client's Marginal Propensity to Save (MPS) and Marginal Propensity to Consume (MPC), which represent the proportion of each additional dollar of income that is saved versus spent. Here’s a step-by-step breakdown of the process:

1. Data Input: The RIA inputs the client's current income, projected post-retirement income, current savings rate, and projected savings rate after retirement. In John's case, this included his $450,000 current income, $75,000 projected income, $150,000 current savings, and $10,000 projected savings.
2. MPS/MPC Calculation: The MPS Calculator uses these inputs to determine John’s MPS and MPC. The formulas are straightforward yet insightful: MPS = (Change in Savings) / (Change in Income) and MPC = 1 - MPS. This calculation reveals how John’s savings habits are likely to change based on his new income level.
3. Retirement Readiness Assessment: The calculated MPS is then integrated with a comprehensive projection of John's total assets, including the value of his RSUs and other investments. This projection simulates various market scenarios and spending patterns to assess his overall retirement readiness.
4. Scenario Planning and Optimization: The RIA can then use the calculator to model different retirement scenarios, adjusting spending plans, investment strategies, and retirement timelines to optimize John’s financial security. This allows for a dynamic and personalized approach to retirement planning.

What sets the MPS Calculator apart from traditional methods is its focus on behavioral economics. By explicitly calculating MPS and MPC, the tool moves beyond static assumptions and provides a more nuanced understanding of how income changes impact savings decisions. This approach integrates seamlessly into an advisor's existing workflow, complementing traditional financial planning software and enhancing the advisor's ability to provide data-driven recommendations. Rather than replacing existing tools, the MPS Calculator augments them, offering a specific focus on a crucial and often overlooked aspect of retirement planning.

Technical Implementation

The Golden Door Asset MPS Calculator is built on a robust and secure cloud-based architecture, designed to handle sensitive financial data with utmost care. The core technology stack includes:

• Backend: Python with the Flask framework provides the API layer, handling requests and responses efficiently. Data processing and calculations are performed using NumPy and Pandas, ensuring accuracy and speed.
• Frontend: React.js is used for the user interface, providing a responsive and intuitive experience for RIAs. Chart.js is integrated for visualizing data and presenting results in a clear and understandable format.
• Database: A PostgreSQL database stores client data securely. Data is encrypted both in transit and at rest using AES-256 encryption.
• Deployment: The application is deployed on AWS (Amazon Web Services), leveraging services like EC2, S3, and RDS for scalability and reliability.

The MPS Calculator integrates with various data sources to provide a comprehensive view of the client's financial situation. This includes integrations with popular custodial platforms like Schwab, Fidelity, and Pershing, allowing RIAs to seamlessly import client account data. The tool also leverages market data APIs to provide real-time investment valuations and projections.

Security and compliance are paramount. Golden Door Asset adheres to strict security protocols and undergoes regular audits to ensure compliance with industry standards, including SOC 2. All data is encrypted, and access controls are implemented to prevent unauthorized access. The application is designed to comply with the SEC’s Regulation S-P, ensuring the privacy and security of client financial information. The system also logs all user activity for auditing purposes, further enhancing security and compliance.

Results & Impact

By utilizing the MPS Calculator, John and his RIA were able to gain a clear understanding of how his reduced income would affect his savings behavior and overall retirement readiness. The initial analysis revealed that John’s projected savings rate after retirement might not be sufficient to maintain his desired lifestyle throughout his retirement years. However, by leveraging the MPS Calculator, John and his advisor were able to model various scenarios and adjust his spending plan and investment strategy accordingly.

Here's a breakdown of the key impacts:

• Optimized Retirement Plan: The MPS Calculator provided valuable insights that allowed John to optimize his retirement plan. He identified areas where he could reduce expenses and fine-tune his investment strategy to ensure long-term financial security.
• Increased Nest Egg: By delaying his retirement by just one year and making minor adjustments to his spending habits, John was able to increase his projected nest egg by $150,000. This provided him with greater peace of mind and flexibility in his retirement years.
• Enhanced Client-Advisor Relationship: The MPS Calculator facilitated a more collaborative and data-driven conversation between John and his RIA, strengthening their relationship and fostering greater trust.

The table below summarizes the key metrics:

These results highlight the significant value that the MPS Calculator can provide to RIAs and their clients. By accurately predicting savings behavior and optimizing retirement plans, RIAs can help their clients achieve their financial goals and secure their financial futures.

Key Takeaways

• Understand the Impact of Income Changes: Recognize that significant income changes can dramatically alter a client's savings behavior. The MPS Calculator provides a tool to quantify this impact.
• Go Beyond Static Assumptions: Avoid relying on static assumptions in retirement planning. Use dynamic tools like the MPS Calculator to model different scenarios and optimize financial strategies.
• Integrate Behavioral Economics: Incorporate behavioral economics principles into your financial planning process. Understanding how clients make financial decisions can lead to more effective and personalized advice.
• Enhance Client Communication: Use the MPS Calculator to facilitate more collaborative and data-driven conversations with your clients. This can strengthen client relationships and foster greater trust.
• Focus on Long-Term Financial Security: Prioritize long-term financial security by helping clients optimize their savings rate and investment strategy. This can lead to a more comfortable and fulfilling retirement.

Why This Matters for Your Firm

In an era of increasing competition and fee compression, RIAs need to leverage technology to deliver superior client service and differentiate themselves from the competition. The Golden Door Asset MPS Calculator provides a powerful tool for achieving these goals. By accurately predicting savings behavior and optimizing retirement plans, you can help your clients achieve their financial goals and secure their financial futures. This not only enhances client satisfaction but also strengthens client retention and fosters positive word-of-mouth referrals.

Imagine being able to confidently answer your clients' questions about early retirement, knowing that you have the tools to provide data-driven insights and personalized recommendations. With Golden Door Asset, you can. We invite you to explore our suite of AI-powered tools and discover how they can transform your practice and empower you to deliver exceptional value to your clients. Visit our website or contact us today to learn more and request a demo. Let Golden Door Asset help you unlock the full potential of your firm and provide your clients with the financial security they deserve.