When building a financial plan with my clients, there are many assumptions which underpin it (investment returns, inflation, longevity, income, expenditure – the list goes on). The chances of all these assumptions being accurate year on year in real life is incredibly unlikely and so to suggest the plan is what will happen is not reasonable (life is anything but a straight line in my experience).
You might be thinking what is the point of the plan then?
Well, the power in Financial Planning is in the process of planning and not the plan itself. Given the sheer number of assumptions we are making these are really guesses about the future. Yes, they are educated guesses but guesses nonetheless. What is important, though, is the guesses are the best we can make with the information we have at the time. As we move forward in time we receive new information and incorporate this into the plan – this is where the value lies, keeping on course for whatever destination we have set (retiring at 60, etc).
The planning process helps us to think about what we want to achieve, where do we want to go, what do we want to be? The human mind is a great tool for solving problem when it is aware there is a problem to solve (and for me, the best way is to forget about the issue and then the answer comes at some point – often when walking or driving, inspiration then arrives from nowhere). When our minds are “tuned in” to something our awareness increases. A good example is when you are looking at a new model of car and suddenly see this everywhere, these cars were always there but unless we think about them, we do not see them. Therefore, thinking about what we want from our lives increases the chances of having fresh ideas about this.
We are therefore committed to a process of continually guessing and not the guesses themselves. This is why a financial plan is not a one-time event and the plan is never “finished”.
A good metaphor is driving at night in the fog. You might not be able to see very far ahead but with an engine (investments & pensions), a map (the financial plan) and a driver (either you or your planner – you then relax as the passenger!) you can make it to your destination.
Warm Regards
Neil
This article should not be considered investment advice or an offer of any product for sale, it contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular, strategy or investment product. Information contained has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not an indicator of future results.
