Financial Planning Is Rarely About The Numbers

If you head out to just about any financial institution and ask for a financial plan, you will soon find yourself amassing a pile of numbers. These numbers are all required to fill in the slots of a questionnaire that feeds a financial planning software program.

Once the numbers are in, the program will dutifully spit out a series of projections based on assumed rate of return, historical inflation rates and a few assumptions about how much you will need to maintain your lifestyle through retirement.

Inflation takes away half your money every twenty years, taxes take another bite, and you are likely going to live a long time. So while you might expect a shock, few people are fully prepared for the sticker that will often come their way at the end of this exercise.

A couple I know recently went through this experience. They were confident about their finances because they had raised a couple of kids, paid off a very nice home and amassed several hundred thousand dollars of retirement savings.

Their incomes totalled about $200,000 per year. The planner asked them how much they thought they needed in retirement. Since they had no real idea, they made the assumption that about 70% of their current income should suffice.

The program chugged away and came up with the savings that they would need. In this case, it was a mere six million dollars. Helpfully, the program also told them that they could reach this goal by saving $128,000 per year for the rest of their working lives.

What followed this exercise was a combination of guilt and projected lifestyle decline. They could not save $128,000 per year, but could they save $100,000? No? How about $65,000, No? How about $50,000? The problem with this sort of exercise is that it ignores a whole bunch of factors that have become part of the baby boomer existence, and now impact all aspects of “retirement” planning.

The first is our affluent lifestyle. Most boomers are spending huge amounts of money on things our parents would never have dreamed of. The couple above had both kids in private school. They enjoy living in a big house in an expensive neighbourhood and have all kinds of expensive hobbies.

A quick look at their cash flow revealed that much of their spending was on items that could go away in retirement—things like private school and the big McMansion. After adjusting for these items, it was possible to bring the accumulation goal into sight.

Baby boomers also tend to work at something through their advancing years. A few years of consulting makes a big difference to any retirement planning projection.

The problem with making financial planning a numbers exercise is that the numbers add little value until they are placed into some type of context. The context you need is unique to you as an individual. What do you want? What will your life look like? Where will you be living? What is important to your family? These are just a few of the questions that need to be asked to put numbers into the right context.

You may find that you cannot save enough to support a particular lifestyle. When you added all of the qualifiers that go along with your dynamic and changing life, you may have come up short.

This does not mean failure; it just means that you can now use your values to construct something that works.

What lifestyle can you support, given what you will have, that will honour what is most dear to you but still be supportable? Live at your cottage? Move to Mexico? Trade your McMansion for a duplex and rent out the other side? Live in a different city, find work you love and do it part time for twenty years? The possibilities are many and several and need to be examined in the context of your values.

We are the richest generation in history. The people who lived before us were shorter-lived and far less wealthy. The numbers will not help you see and feel your wealth until they are put into context. Most of us have the raw ingredients to make a plan that creates financial independence. Since that plan is unique to you, unfortunately or fortunately, you will probably have to write a lot of it yourself.

Alan MacDonald, an investment advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon. For more information please visit www.alanmacdonald.ca email: Alan.Macdonald@RichardsonGMP.com.

All material has been prepared by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.