Financial Planning with the Model-Family

In this post, we show the process of a simple financial planning session step-by-step. We outline which data we collect and how we use this data to model your family’s financial future. Further, we explain how financial planning software can pinpoint shortcomings and help in resolving these.

Why Financial Planning is Important

How do you decide how much to spend and save each month to stay financially healthy? You sure have goals, but what is the probability of achieving those goals? A financial plan helps you in making informed decisions for all stages of life: now, in the near future, or for your retirement. Can you retire when you plan to, or do you have to work longer? Can you maintain your lifestyle in retirement, or do you need to cut back? Your financial plan is a personalized living document that evolves with you and adapts as life progresses. Every sound financial advice starts with developing a financial plan: a comprehensive overview of your financial status and goals, and the road to get there. Similar to getting a physical exam each year, your financial plan should be reviewed each year and adjusted if necessary.

Collecting Data

Personal Information

Financial advisors start every financial planning session with collecting personal information. Our fictitious family, the Model-Family, lives in King County, Washington. John is 45, and Mary is 40. Together, they have two children, Bob born 2004 and Jane born 2007. In the financial planning process, we consider children at a later stage and as part of the goals. Therefore, we focus on John and Mary for now.

Financial Planning: Personal Data

John is gainfully employed, while Mary is a homemaker. We add John’s annual income here, but this number has only limited relevance: Throughout the financial planning process, we use the income only to calculate 401(k) maximum contributions and social security benefits. This makes sense because income tells us nothing about the actual contributions to savings or retirement accounts.

Financial Planning: Retirement Period

Next, we determine the retirement period, which we calculate as the delta between retirement age and life expectancy. John and Mary plan to retire when John turns 65, which will be in 2039. Life expectancy is an unpleasant question to think about, but it is an essential one. John and Mary are both non-smokers, and we can look up realistic data in Life Expectancy Tables. Depending on health status, family history, and personal preference, these numbers can be adjusted.

Expense Levels

The financial planning process models your economic future through one or more accounts and assets. The individual goals deplete these accounts while savings accumulate in these accounts. From this angle, income is not a factor unless we commit it towards an account. Let’s start with the goals.

Financial Planning: Goals

We distinguish goals from three expense levels: needs, wants, and wishes. Needs are absolute necessities like housing, basic living expenses, health care, and transportation. Wants are optional expenditures, for example, pets, college tuition, a second car, eating out, or entertainment. Wishes are our blue sky goals, including traveling, hobbies, home remodel, a yacht, or a sportscar. Wants and wishes are somewhat interchangeable: One family member’s wish might be another’s want. Whatever goal you dream about, we should collect them and check for feasibility. For the Model-family, we decided to keep things simple and only enter a few financial goals.

We measure almost all amounts entered into the financial planning software in today’s dollars. The software then inflates these amounts as required. Thinking in today’s dollars greatly simplifies the planning process, and also allows us to adjust the plan to varying inflation rates. We’ll get back to that later when we look at scenarios.

Entering Goals

John and Mary bought their home in 2009 for $390,000. They have a mortgage on their home, $290,000 as a 30-year fixed loan at 4.2%, leaving them with an annual payment of $17,016. The Models plan to have their mortgage paid off in 2039, the year John retires. The couple plans to sell their home the same year and buy a condo instead. We include the mortgage payments in the basic living expenses of $48,000 during retirement. Once the mortgage is paid off, the living expenses will then be reduced accordingly. We determine the Model family’s basic living expenses in retirement from their current monthly expenses. While today’s numbers cover a family of four, we only slightly adjust the amounts downwards for the two future retirees. The condo is a separate goal, while we will see the sale of their residence together with their retirement income.

Of course, the Model-family also needs transportation. Right now, they own two cars, paid for in cash. They plan to replace the cars every six years, for $20,000 and $25,000 after trade-in. Once John retires, they will only need one car. Also, they consider their second car a want, as they could get by without it if necessary.

The Model-family feels strongly that good education is the key to success in life. They’d like for both their children to go to college; we assume four years of public college, out of state. The financial planning software estimates the total tuition at $41,950 per child, but we can also set a more precise amount.

John and Mary love to travel with their children, and they spend a considerable amount on that each year. If possible, they want to explore even more, once they are empty nesters. Their biggest dream is buying an RV when John retires and travel the continent. However, these are all wishes, and John and Mary are quite willing to give them up for securing their children’s future.

Financial Plan: Goal Timeline

Goals Review

Now that we have completed entering the goals, it is time to review them to make sure we have captured them correctly. The goal timeline shows the Model-family’s goals over the years to come. We can see the major transition in 2039 when John plans to retire.

Financial Planning: Goal Expenses

The goal expenses view shows the Model-family’s annual expenses over the years, measured in after-tax, future-dollars. The amounts continuously increase due to inflation. We can easily spot the Model-children’s college years, and we get a glimpse of how 2039 might be John’s and Mary’s most significant year in terms of expenses: That year they plan to sell their home, buy a condo, and buy an RV, all while transitioning from receiving salary to living off of their savings.

Financial Planning: Social Security

Social Security

John and Mary need to fund all their goals through income, savings, and assets. Being an employee for all of his life, John is eligible for social security benefits. Unfortunately, Mary is not. The software calculates an estimate for us, but we can also enter an exact number here. John and Mary have no other retirement income.

Financial Planning: Investment Assets

Retirement and Investment Accounts

The Model couple knows the importance of saving for their retirement. Therefore, John maxes out his 401(k) contributions at currently $19,000 per year. His employer matches 100% of John’s contributions, up to a maximum of 4% of his annual salary. But John and Mary save even more: In a typical month and in addition to John’s 401(k), they save another $2,000 in a taxable account. However, they also use this account to fund goals along their way toward retirement, most importantly, their cars, travel, and their children’s college education. We assume this family does not have any educational savings plans to keep the example simple. Note how we express savings explicitly, instead of calculating them as the difference between income and goal expenses.

For each account, we can specify the capital allocation toward typical asset classes. The software uses this information to determine the average return, as well as the volatility in these accounts. John and Mary have chosen a simple stock/bond allocation, with approximately 65% in stocks.

Financial Planning: Other Assets

Other Assets

John and Mary’s financial plan contains additional assets. First and foremost, they have their primary residence. As mentioned above, they are planning to sell it and buy a condo instead. The financial planning software supports us with a worksheet to calculate future value for the home, as well as the net proceeds after transaction costs and taxes. Also, John is expecting an inheritance sometime in the coming ten years. While the exact amount is as unknown as the date, we assume $100,000 in 2030.

Financial Planning: Risk Score

When we invest in assets, we do so for appreciation in value. We have specified the asset allocation as part of the investment accounts, but we also want to double-check if the current asset allocation is suitable to achieve the family’s goals. John and Mary Model are conservative: They feel comfortable with the risk profile of a typical 60/40 stock/bond portfolio.


Current Scenario

Now that we have finished modeling John and Mary’s financial future, we are curious to see the probability of success. Will they be able to fund all their goals? Unfortunately, we cannot predict the future, so typical financial planning software uses a different method: Monte Carlo simulations. This method generates a swarm of hypothetical outcomes, based on historical statistical data for the return and volatility of their investments. Based on 1,000 simulated trials, we can determine the likelihood of success to reach all goals.

Financial Planning: Likelihood of Success

Unfortunately, the news is not good for John and Mary: The software calculates that their chance of meeting their financial goals is zero. While this is, of course, a disappointing outcome, we can also spot where the issue is: It seems that in all likelihood, the Models will have difficulties funding their children’s college education and will run out of money sometime between 2025 and 2028. Knowing about this shortcoming is the first step to finding a workable solution.

What Now?

How can John and Mary secure their financial future and fund their children’s college education? If they can help it, they’d rather not launch their children into life with the burden of a college loan. The Model couple is aware they might need to give something up, but what is the best course of action? Should John retire later? How about giving up their dream of an RV? Does it make sense to cut expenses during retirement? The answer to all these questions is no: while these adjustments impact later years and retirement, they won’t do much to improve the bottleneck during the college years. The option of getting a second mortgage to pay for college is not something John and Mary want to consider.

The financial planning software lends us a hand with a neat feature: the play zone, in which we can experiment with adjustments and see how each one affects the likelihood of achieving our goals.

As an example, John and Mary are wondering if they should adopt a more aggressive investment approach to accumulate faster. The financial planning tool tells us that most likely, this is not a good idea. As counterintuitive as it seems, the higher volatility of a more aggressive investment approach actually reduces the likelihood of success, because the college expenses are only a few years away.

Financial Planning: Play Zone

Adjusting the Plan

After some consideration, John and Mary’s financial planner comes up with a recommendation:

  • Bob is a great football player. Very likely, he will receive a scholarship, reducing his tuition to approximately $30,000 per year.
  • While money is tight, the Model family should cut back on their travel expenses. The recommended plan includes only $2,000 per year until Bob and Jane finished college.
  • We estimated the Models’ second car with a replacement cost of $25,000 every six years. We have reduced that to $20,000, just like their first car.
  • And finally, it seems that John and Mary can save another $100 each month.

With these changes, John and Mary now have a 72% chance of being able to fund all of their goals. What a great achievement!

Even though these measures bring the Model family closer to reaching their financial goals, these might not be the changes you would have made. Financial planning is not a boilerplate process but highly individual. For instance, you might prefer a different approach:

  • Reducing college costs by sending the children to an in-state public college.
  • Mary decides to work part-time while the children are in school.
  • John gets a promotion with a significant salary increase.
  • Mary also expects an inheritance from her family.
  • Replace cars not every six years but every eight.
  • Bridging the financial gap with a college load.

Your financial planner will work with you to find suitable solutions and raise the confidence level where you feel you need it to be. We can experiment with changing each parameter and see the outcome.

Financial Planning: What Are You Afraid Of

What Are You Afraid Of?

Financial planning doesn’t stop here. There are still many risk factors that might keep you awake at night. It is worth looking into these factors, to make sure the financial plan is robust, even when things don’t go the way we hoped they would. We can model risk scenarios, including recession losses, higher inflation, social security cuts, lower returns, outlived savings, or increased health care costs. For each expense level, and for each scenario, your financial planner can calculate the likelihood of success. The picture shows one example of a risk scenario: We can model the future outcome when assuming a recession-related percentage loss of savings.


This brings us to the end of our financial planning session with the Model-family. We very much hope that we’ve been able to provide some insight into the financial planning process. In our view, the financial plan is an essential document, detailing your financial future, and estimating the prospects of you reaching your financial goals. If you don’t have one yet, you should consult a financial planner now.

At Bertram Solutions, we recommend financial planning to all of our clients as a prerequisite to wealth management. We review each financial plan with our clients once a year to ensure accuracy and that we are still on target. The financial plan helps us to suggest adjustments, find solutions to reflect changing circumstances, or to get things back on track. We pride ourselves in our data-driven approach to investment advice, our independent research, and our highly individualized guidance for each client.