What you need to ensure your financial plan takes off properly

By David Lamb CFP™ MCSI

A pilot wouldn’t dream of taking off without a flight plan and a properly qualified financial adviser shouldn’t provide advice without a properly constructed financial plan.

In the ideal world, a financial plan would be built using a crystal ball. Unfortunately, we do not live in an ideal world, so a financial plan needs to be based round cashflow projections, to give you a glimpse into your financial future. I’ll go into more depth on cash flow modelling later in this series of blogs.

Like all projections we need to make assumptions. These include:

  • life expectancy
  • inflation (rates for prices, earnings, house prices etc may differ)
  • investment returns for different asset classes (which will then help in providing projected returns according to your own investment risk profile)
  • changing spending patterns at different stages of your life (ideally you will probably want to spend more during the ‘active retirement’ phase of your life on holidays, fun and recreation etc than you will during the ‘traditional retirement’ phase, when you normally spend less because you are slowing down)
  • the cost – and length of stay – of long term care.

These assumptions must be both reasoned and reasonable – and it is essential that your planner agrees these with you before looking at your cash flow projections.

If you don’t have confidence in the assumptions, it follows that you will not have confidence in the outcomes. If you are not confident in the outcomes, your plan will be meaningless, you all have wasted both your time and money and your financial future will remain uncertain.

At your first meeting with your prospective financial planner, ask to see their Assumptions Document. Do you understand them and are you happy to accept them? Don’t be afraid to ask to see their research to confirm those assumptions are reasoned and reasonable.

Of course, there is only one thing you can guarantee about assumptions…they will be wrong!

Changes in your career, lifestyle and the economy all affect your cashflow projections. So like the pilot with his flight plan who will constantly have to adjust to ensure he arrives at the correct destination, your financial planner must constantly review the assumptions and revise the projections, which is why regular planning reviews are essential.

Once we have the data and have agreed with the assumptions, we look at what we can do with this information. More on that in our next blog.