I’m often impressed with the care that clients put into their financial plans prior to coming to see me. They come prepared with amazing spreadsheets containing their financial plan. The only problem is that they are linear. They’ve got a flat rate of return of 6 percent, a flat tax rate (or no taxes), a static inflation rate. If I take that plan and realistically modify one of those elements, then the whole plan is thrown off.
People don’t really think through all the potential “what-ifs” – and to be honest, it’s not possible to specifically plan for the unexpected. However, there’s often a lack of strategy that results in not considering truly reliable factors such as inflation, market volatility, long-term disability or long-term care.
The problem is that they are basing their future wealth on a simple formula:
Money X time X percent of return = future wealth
This formula states that your financial plan consists of investing money with a projected return. Using this formula, you should end up with amount X of future wealth, which is not how reality works. What happens if your rate of return changes for the worse? What if the time to meet the projected financial goal is cut short? What if the amount of money you have changes? Changing one variable changes the outcome; changing two variables destroys your plan.
The key is to understand all the variables and develop strategies to mitigate and offset or reduce the impact of all these different things that are going to happen that can’t be predicted. And yet, there is no telling what is going to happen at the end of the day. The markets are down as I write these words. Where will they be a month from now? A year from now? When you retire?
The situation you want to find yourself in is having a financial plan you can feel confident and safe about, regardless of what the future holds. Creating this kind of plan requires thinking outside of the conventional financial planning box – meaning, it will require a unique approach for your unique life, goals, obligations, etc.
Everyone is different. Every financial plan should also be different. Creating your financial work of art means peeling back the layers on your financial life and looking at current and past circumstances, then chiseling away at what’s not great about a plan. A financial plan is a work of art because the unique dynamics of the individual dictate the outcome of that plan.
Instead of a single product, you need a plan that has multiple financial products coming together to help you reduce taxes, reduce risk, reduce fees and costs while increasing your savings rate, increasing your retirement income, putting more benefits and protection around your wealth, and ultimately, passing more to your family. That’s the ultimate goal and that’s when you’ll know that you have a financial plan that will stand the test of time and circumstances – no matter what they are.