“Why do I need a financial plan?”

Q. I am in my early 50s, have a steady job, I’m not a big spender, and I make RRSP contributions. Why would I need a financial plan? I don’t see how it could help me.

A. To answer your question (and it’s a good one!), let’s think about why people get a plan, the benefits of having a plan and how you can get the most out of one.

Planning is about mastering change, and there are generally two types of plans: reactive and proactive.

Reactive plans occur when there has been a change in a person’s life and they need a solution, such as a change of jobs, divorce, when transitioning to retirement, commuting a pension, etc. 

Proactive planning is about thinking about life and seeing what is possible. You’re looking ahead at how to maintain and enhance your lifestyle over your lifetime without the fear of ever running out of money, no matter what. Proactive planning is almost always a work in progress, because life happens, and people’s needs and wants change. The important thing is to have a planning model you can access at any time to help you make important financial and lifestyle decisions. 

Some of the benefits of planning are:

  • Peace of mind. Understanding where you are today and where you are going.  Are you going to have enough or too much money?
  • Financial security. Learn what you need to do to secure your future. 
  • Take less risk. Are you taking unnecessary risks to maintain your lifestyle?
  • Setting a finish line. Knowing how much you need.
  • Less guilt. Without a clear understanding of your financial future do you feel guilty spending money, taking your family out for dinner, or travelling? 
  • More time/choices. Could you retire sooner, take on a less stressful job at a lower salary, or start a business?  
  • Providing a real sense of purpose and motivation—your “why.” What are you working so hard for?  
  • Prioritizing what is important.
  • Making sound lifestyle and financial choices.

When it comes to proactive planning and thinking, there are lots of simple software programs available, as well as people willing to run projections for you—but that is not really what planning is about. It’s about finding a “thinking partner” with whom you can share your life story, who will marry your story with your financial reality, giving you the opportunity to see how your life might unfold, and exploring the possibilities.  

In my opinion, this is best done where you and your planner build a computer model together, and you witness the impact of your financial and lifestyle changes in real time. Other planners, though, prefer to gather your information and then present you with a paper-based solution. You can choose the approach that is best suited to you and your learning style.  

Modelling your cash flow is important, right down to the cost of your pet’s food, as your expenses are a reflection of your lifestyle. Plus, it helps your planner or “thinking partner” to really get to know you.   

If a planner doesn’t have cash flow information, then the approach turns to answering the question: “Can I live on $80,000 a year indexed after tax in retirement?” And that, in turn, reduces a lifestyle plan to a simple retirement assessment, and all of the “thinking” shifts to the financial planner’s area of expertise, leaving you out.  It is important that you discuss and model the trips you want to take, the vehicles you want to own, the donations you want to make, and all the rest, to see the impacts on your future. 

What if you find you haven’t saved enough and $80,000 a year doesn’t work? You could then see if $70,000 a year works; if it does great, problem solved. But what did you give up to make it work—travel?  Recreational activities?

Keep in mind that the savings required to provide $80,000 a year in retirement income to age 95 is a lot more than is required for $80,000 a year of income to start, then decreasing as you age and slow your travel, vehicle purchases, sell your home, move to an apartment, etc.

Including cash flow details in your plan and imagining how they may change over time is what keeps you involved and thinking—and it’s that thinking that will lead you to your biggest insights. A colleague of mine often says: “If it’s not a cash-flow plan, it’s not a plan.”

Reviewing your planning model annually, making adjustments and checking assumptions, builds your confidence in the model and its outcomes, giving you more and more financial clarity, leading ultimately to financial freedom.

Finally, Tom, there is no point in doing a plan if you’re not going to act on some or all of the solutions you arrive at. Now, do you need a plan? I don’t know. If nothing here resonates with you, then maybe not.  If you’re not sure, contact a planner for an initial consultation which is often offered at their own expense.  During that time, they’ll confirm if they can help, and you’ll assess their approach to see if it fits your needs. Hey, and with Zoom, you won’t even have to leave the house. 

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.




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