Almost everyone who has worked with a financial professional has some sort of a financial plan in place. But that term, “financial plan,” is similar to the term “vehicle” – it's a generality that doesn't communicate whether a person is driving a new BMW, a 1920 Model T, or a tractor.
Financial plans can run the gamut from a simple needs analysis of one's life insurance to a projection of when a person can retire based on their assets, a rate of return, and their saving rate.
The trouble with those “plans” is that they really aren’t “planning” for anything. They project a situation and tell you what would happen to you if it occurred. (Technically, this procedure is called a “scenario analysis.”) Then, the person engineering the scenario can tell you how to fix it. Sometimes this leads to the sale of some sort of financial product, such as an insurance policy or annuity.
These can be good things. They alert people to real problems and propose solutions. That may be exactly what a person needs. However, some people simply need more. They may struggle with choosing among multiple paths; each choice leads to four more choices, and each of those to four more, and some of those choices can be simultaneous and exclusive of each other. It can become overwhelming.
For those who feel that way, here is a different, multi-step idea of a financial plan. The first step involves taking stock of what “is” – that is, identifying what one is doing currently and what they plan to do if nothing interferes. Working with their planner, they'd then identify their goals, fears, and priorities. Then the planner would use the same planning software to model out the different scenarios that their client described, both the aspirational (goals) and those that the client fears (perhaps death, disability, or nursing home care). In addition, the planner would model out a number of scenarios that the client ought to be prepared for or aware of, in their professional opinion (such as inflation or a bear market).
Then the planner would also model out remedies for the negative situations. This is very important, as sometimes the cure for some problem can be destructive to the other goals. Think of a person who is so afraid of a market downturn that they invest too conservatively, and inflation erodes their purchasing power. If a planner models out these various scenarios, the clients can see for themselves what can happen. It’s similar to reading one of those old Choose Your Own Adventure books multiple times. The clients can see the end results of their own choices and make their decisions with open eyes.
This is a more comprehensive form of planning, described as “financial modeling and scenario analysis.” Not catchy, but very comforting. Clients who go this route can call up their planner and say, “Thanks for modeling out for me exactly what I would do if the market suddenly dropped by 35%. I would have worried, but we already considered a similar scenario.” That’s planning.
To explore some of the ways that I can help you "choose your own adventure," please send me an email or give me a call at (608) 835-1245, and let's get the ball rolling.