I have been thinking about financial planning at a very condensed level lately. I have come to believe that it should have three values. Simple, secure and sufficient.
If a client is to be 1) capable of managing the strategic level and 2) able to make tactical decisions, there must be simplicity. Not because the pieces are simple, they are not, but rather simple in the sense that the client understands the direction and shape of the plan and can recognize how the methods used relate to that. Clients must ask questions. If they do not, they almost certainly don’t get the gist of the plan.
Like simplicity. Security is not absolute. Security relates to predictability and there should be a range for the amount needed. The client should participate in the range setting. For example, at retirement 30 years hence, the range of acceptable values will likely be fairly wide. No one knows the cost of living then nor the duration of life still to be enjoyed. It is wrong to cast the portfolio value then as some sort of sacred number. If it becomes a number, then yield becomes crucial and that is too variable for comfort during the years ahead. Tools like diversification and insurance matter.
The last aspect, sufficiency, is about mindset. If you have enough, how much more should you have? There is a conflict here that some advisors exploit. It has to do with answering the wrong question. If you need capital sufficient to provide a given lifestyle for the rest of life, there is a fairly easy arithmetic calculation that generates a number. That number is not sacred. It is often much too high.
Be aware of the following:
Advisors typically get paid based on assets under management. Their problem is to increase that amount. You have a need to have the right amount at retirement. It might be much lower than their target. Use your own values for cash needs and any shortfall to find out.
It all ends up the same way. What you lose you cannot spend or leave to your heirs. What you leave could have been spent and if you prefer leaving money you must plan for it. Stewardship ideas matter.
Know what your plan means. Pay a little attention and it will work out better.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.