“Why do I need a financial plan?”

What is financial planning?

To answer your question—and it’s a good one!—let’s think about why people get a financial plan, the benefits of having one and how you can get the most out of it.

Financial planning is about mastering change, and there are generally two types of plans: reactive and proactive.

Reactive financial plans are used when there has been a change in a person’s life and they need a solution, such as a change of jobs, divorce, when transitioning to retirement, commuting a pension, etc. 

Proactive financial planning is about thinking about life and seeing what is possible. You’re looking ahead at how to maintain and enhance your lifestyle over your lifetime without the fear of ever running out of money, no matter what. Proactive planning is almost always a work in progress, because life happens, and people’s needs and wants change. The important thing is to have a planning model you can access at any time to help you make important financial and lifestyle decisions. 

What does financial planning and analysis do?

Here are the benefits of creating a plan for your future:

• Peace of mind. It gives you understanding of where you are today and where you are going. You have the opportunity to ask: “Are you going to have enough or too much money?”
• Financial security. You can learn what you need to do to secure your future. 
• Take less risk. Find out if you are taking any unnecessary risks to maintain your lifestyle.
• Setting a finish line. A personalized financial plan is about knowing how much money you need.
• Less guilt. Without a clear understanding of your financial future, you can feel guilty spending money, taking your family out for dinner, or travelling.
• More time/choices. Make sound lifestyle and financial choices. A plan allows you to make decisions like retiring sooner, taking a less stressful job for a lower salary, or even start your own business.
• Prioritizing what is important. Providing a real sense of purpose and motivation—your “why.” Find out what are you working so hard for.

Watch: How do I mentally prepare for retirement?

How to create a financial plan

When it comes to proactive planning and thinking, there are lots of simple software programs available, as well as people willing to run projections for you—but that is not really what planning is about. It’s about finding a “thinking partner” with whom you can share your life story, who will marry your story with your financial reality, giving you the opportunity to see how your life might unfold, and exploring the possibilities.

In my opinion, this is best done where you and a Certified Financial Planner build a computer model together, and you witness the impact of your financial and lifestyle changes in real time. There are planners, though, who prefer to gather your information and then present you with a paper-based solution. You can choose the approach that is best suited to you and your learning style.

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Why cash flow is part of your plan

Modelling cash flow is important—right down to the cost of pet’s food—as your expenses are a reflection of your lifestyle. Plus, it helps your planner—or “thinking partner”—to really get to know you. 

If a financial planner doesn’t have your cash flow information, then the approach turns to answering the question: “Can I live on $80,000 a year indexed after tax in retirement?” And that, in turn, reduces a lifestyle plan to a simple retirement assessment, and all of the “thinking” shifts to the financial planner’s area of expertise, leaving you out. It is important that you discuss and model the trips you want to take, the vehicles you want to own, the donations you want to make, and all the rest, to see the impacts on your future. 

What if you find you haven’t saved enough and $80,000 a year doesn’t work for you? You could then see if $70,000 a year works; if it does great, problem solved. But what did you give up to make it work—travel? Recreational activities? This is why it’s so important to look at the whole picture for your finances.

Keep in mind that the savings required to provide $80,000 a year in retirement income to age 95 is a lot more than is required for $80,000 a year of income to start, then decreasing as you age and slow your travel, vehicle purchases, sell your home, move to an apartment and so on.

Including the cash flow details in your financial plan and imagining how they may change over time are what keep you involved and thinking about your current situation and your future. And it’s that thinking that will lead you to your biggest insights.

A colleague of mine often says: “If it’s not a cash-flow plan, it’s not a plan.”

An annual financial plan just makes sense

Reviewing your financial planning model annually, making adjustments and checking assumptions, builds your confidence in the model and its outcomes, giving you more and more financial clarity, leading ultimately to financial freedom.

Finally, Tom, there is no point in doing a financial plan if you’re not going to act on some or all of the solutions you arrive at.

Now, do you need a plan? I don’t know. If nothing here resonates with you and you’re confident with your registered retirement savings plan (RRSP), then maybe not. If you’re not sure, contact a financial planner for an initial consultation which is often offered at their own expense. During that time, they’ll confirm if they can help, and you’ll assess their approach to see if it fits your needs.

Hey, and with Zoom, you won’t even have to leave the house. 

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at atlantisfinancial.ca or [email protected].

Read more on retirement:

• Planning for retirement with little or no savings to draw on
• How might inflation impact your retirement plans?
• Financial planning in your 70s
• “Where do we pay income tax if we retire abroad?”

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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