Financial Planning – The key component your investment portfolio might be missing.

Your investments may have been doing fine lately, but you still have questions, and wonder whether you or your advisor really are making wise decisions with your money. Financial Planning can provide meaningful insight into your financial future and give you a game plan of how to reach your goals. Plus much more.

Whether you’re a couple with a wide difference in risk tolerance, an incorporated professional with tax issues, someone with a large estate to plan for, or just thinking about retirement, a financial plan will help you understand how to invest. Whether you want to focus on the bottom line, or on specific components, such as retirement, estates, cross border, investment diversity and more, financial planning brings the clarity needed to make informed decisions.

What are the some of the variable factors a Financial Planner looks at?

1)      Investment rate of return (going forward)

2)      Taxes (tax credits, dividends, tax rates, tax sheltered accounts)

3)      Laws (such as trusts, income splitting, estate rules)

4)      Government benefits (OAS, CPP, age eligibility, Claw-back threshold)

5)      Personal health changes (increased costs of personal care affecting future withdrawal rate, shortened life, insurance ineligibility)

6)      Family changes (Divorce, death, 2nd marriages, blended families, children, grandchildren)

7)      Cash flow (follow the savings plan or spending budget)

8)      Inflation (cost of future goods)

With Financial Planning, it’s easy to delve into “what if” scenarios to test for potential changes to a few variables, such as living longer, purchasing another asset, gifting money to children, market shocks – or anything that may worry you.

“Marry” Financial Planning with Investments – It’s the good love.

Investment accounts are the most common assets used for liquidity to fund retirement.  A knowledgeable financial planner who is familiar with various investments, risk tolerance, and risk/return expectations of diverse asset classes should be able to provide return projections which will help you decide if your current investments are aligned with your return requirements to meet your goals.

Updates and Reviews

A financial plan should be treated like a living document at the forefront of all your financial decisions. Regular updates will demonstrate whether you’re on track and help you avoid pitfalls, while providing ongoing transparency, a key to investor confidence. And as financial plans contain a great deal of data, mathematical variables or assumptions, such as future investment returns, inflation rates, or future/current tax implications, they need to be validated for truth as time goes on.

There are differing opinions on when a plan should be reviewed or updated. I believe the variables need to be checked every year, as it only takes a small deviance over a long period of time to derail a good plan and produce dramatically different results than expected.  When we update we can see early warning signals of “cracks” that may start to appear, giving ample time to make adjustments before they become unmanageable “craters”. Additionally, updating performance each year provides unparalleled transparency.

Reviews should be done when there is a life changing event or annually. Retired people should have their annual reviews in November/December to plan the upcoming years’ withdrawals.

An example of why you need to review:

In a simplified situation, let’s say a couple within 10 years of retirement has $500,000 worth of investment assets. If they are able to achieve an 8% annualized return on investments, it can translate to a full retirement lasting to age 92 with $72,000 in after tax income yearly (plus a cost of living raise yearly). However, if the rate of return drops by a mere 1%, to 7% – they run out of money at age 81 – a terrible time to be facing a major financial crunch. In reality, whatever your rate of return actually is, a small deviance of what was desired over a long period of time changes the outcome drastically from what was initially expected.

Other common financial planning areas

1)      Estate planning – how to best structure what you leave behind – efficiently, privately, fairly. Use of trusts, or foundations.

2)      Insurance requirements – knowing the amount of insurance that’s appropriate, and for what purpose; such as estate preservation or income protection.

3)      Budgeting – current budget to find excess cash flow, or forecasting to determine future income requirements.

4)      Taxes – structuring assets to maximize efficiencies, 2nd properties, out of Country assets, US estate tax potential, dual citizens, or incorporated assets.

5)      Unexpected expenses – medical costs, long term care, maintaining two households (one spouse in long term care, the other at home)

6)      Divorce – splitting assets or income

7)      Sudden loss of capital – market loss, theft, extraordinary event.

8)      Loss of income – premature need to access investments

9)      Early death of income earner         

10)   Fees – Capital appreciation takes time. Yet holding onto expensive (fees) or under performing investments for a long time could derail an otherwise secure financial future.

How to choose a financial planner?

1) Experience – An experienced planner knows the type of data that should go into the plan, can effectively communicate the results, and understands which variables can be changed, and how. They will see areas that can be improved upon, see red flags, and provide good advice surrounding many types of situations.

2) Qualifications – Look for someone with credentials, such as Certified Financial Planner, a designation that takes years of ongoing study to achieve and maintain. Ideally, they will be well versed in other fields of expertise such as estate planning, investments, or accounting, thereby providing a more holistic experience. The more knowledge, the higher the quality of advice provided.

3) Dependability – You should be able to rely on your financial planner for many years. Considering a plan should be a “living document” – it’s best to work with someone that you know will be dependable for some time.

4) How they get paid – How a planner gets paid could affect how often you work with them, and what they are able to deliver for you. Knowledge, experience and integrity should be the main drivers. You can either pay an hourly fee, or look for a firm that includes financial planning as part of their investment management fee, at no additional cost to you. In any case, fees should be disclosed and transparent.