Proper Financial Planning: Threshold Hypothesis and Lifetime Liability Forecast
When financial planning, plan the client before you plan the money.
Once you have identified the client’s life goals (their favourite future), attach a cost to it. We call this the lifetime liability forecast. It can be expressed in three parts:
A. Basic Expenditure (Region 1 – Poverty Zone)
B. Lifestyle Expenditure (Region 2 – Responsible Wellbeing)
C. Luxury Expenditure (Region 3 – Affluence/ excess)
It will vary from client to client depending on their circumstances, location, mindset. But in Western cultures:
(a) Minimum necessary c £24k annual consumption level.
(b) Threshold hypothesis (best case marginal increase in wellbeing) c £75k annual consumption level.
When planning the client for maximum wellbeing our target consumption level in the lifetime cashflow forecast is Point (b) Threshold Hypothesis.
Vitality Assets, Longevity, and Economic Activity.
When considering the client’s vitality assets (These assets are vital. Mental and physical health and well-being, e.g., friendships, positive family relationships and partnerships, personal fitness, and lifestyle choices) –
We produce a life expectancy, and a healthy life expectancy.
Roughly, a client can remain economically active for a healthy life expectancy, followed by a period of economic inactivity (referred to as retirement).
Asset Strategies
When we have the life plan, and corresponding lifetime liability forecast, the financial planner then must put in place the financial architecture to support the life plan.
That is a lifetime cash flow forecast is produced to place sufficient financial assets year by year to match the liability. The result is a financial plan.
There are three ways to do this:
A. Income – from economic activity.
B. Income and capital – from life savings.
C. A combination of A and B.
Example: £75,000 per annum lifetime liability forecast.
Life expectancy 20 years.
Available Asset Strategies:
A. Earned Income £75,000 x 20 years, and NO life savings or
B. No earned income, and £1.5m in life savings, or
c. Earned Income £75,000 x 10 years, and £750,000 life savings.
The Non-Intermediating Financial Planner
The aim of the financial planner is simply for their client to live longer better.
To do this we need to help the client remain active as long as possible, it’s called eudaimonic wellbeing. We do this by identifying an Ikigai Project (doing what you are good at, love to do, the world needs, and will pay you for). This is work that doesn’t feel like work, from which you may never wish to retire. We can also look at strategies to exchange know-how for income instead of time, to make the income stream passive and sustainable beyond health life expectancy for a lifetime.
”If you want to die early, retire to golf, fishing, popping prescriptions, and occasionally seeing the grandkids.” – Stephen R. Covey, The 8th Habit.
The ideal strategy pursued by populations in the world’s blue zones.
The term “Blue Zone” refers to geographic areas where people live significantly longer lives, often reaching the age of 100 at rates much higher than those in other regions. These zones were identified through demographic research and epidemiological studies, and they are notable for having populations that not only live longer but also have lower rates of chronic diseases.
The concept was popularised by Dan Buettner, a National Geographic Fellow and author, who identified five Blue Zones:
- Okinawa, Japan
- Sardinia, Italy
- Nicoya Peninsula, Costa Rica
- Ikaria, Greece
- Loma Linda, California, USA
In these areas, lifestyle factors such as diet, physical activity, social engagement, and even a sense of purpose are believed to contribute to the longevity and health of the inhabitants.
The Non-intermediating financial planner is fixing the client’s financial plan with a “blue zone” mindset.
However, an intermediating financial planner is typically paid on a percentage of assets under management. They are “recommending” Strategy B. Non-intermediating financial planners would question the “suitability” of option B, the cliff-edge “retire early” strategy. Really the planner should be accountable should their client live shorter worse!
That’s why we believe transaction bias should be eliminated, and there should be a wall between advice and product.
Our problem is not with the worker, it is with the work.
Academy of Life Planning 
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