What is a Financial Plan
By Scott McClatchey, CFP®
I’m a CERTIFIED FINANCIAL PLANNER™, or CFP®, meaning I help clients create plans to meet their major financial goals (e.g., retirement, start new business). The key element is a Financial Plan, which forms a roadmap to and through retirement or whatever financial goal(s) a client has established.
Although many insurance agents and investment advisors claim to be “financial planners”, they specialize in insurance or investment management and don’t have the educational or experiential background required to practice true financial planning, as delineated by the CFP® Board of Standards https://www.letsmakeaplan.org/how-to-choose-a-planner/why-choose-a-cfp-professional .
To create a financial plan, CFP®’s first gather client information such as investment, Social Security, pension, and annuity statements, if applicable, insurance policies, work and tax information, spending profiles, and family details. Financial plans are goal-centric, meaning client goals drive the planning exercise and ultimately determine retirement readiness and margin-of-safety. Most clients need help establishing their goals, or at least adding breadth, specificity, and reality. Consequently, part of my planning process is discussing potential goals with clients and helping them refine and quantify their goals.
The “big-one” is how much retirement income is needed. This is a critical planning variable and one I look at from a couple different perspectives. How much is the client spending now, during her/his working years? Is the client following a budget? Most aren’t, so I typically improvise by factoring down their pre-retirement income (e.g., plan for 80% of working income throughout retirement). Retirement income is also one of the many scenarios I run, meaning once the baseline financial plan is established, I vary the level of retirement income to see how various spending levels impact the plan.
In all, I run between 25 and 35 different scenarios, which collectively provides a “stress-test” while helping clients understand their margin-of-safety. Scenarios vary unknowns like inflation, rate of return, Social Security filing strategies, lifespan, long-term care needs, as well as retirement income. Each scenario results from running 1,000 simulations – called a Monte Carlo simulator – to determine the probability of success. Planners have software tools to help run these simulations. Retirement is considered successful when clients don’t run out of money before running out of time – i.e., they don’t burn through their investments before passing away.
The “big-one” is how much retirement income is needed.
If the primary goal is a successful retirement, the plan will assess a client’s readiness prior to retirement and form an action plan to get them on track for those who don’t already have adequate margin-of-safety. Do they need to save and invest more, work longer, reset their income goals, change the way they’re currently investing, do part-time work during retirement, or some combination? Once someone has retired, a financial plan can still be valuable as a statistical decision-making tool, providing a framework for making important financial decisions. I’ve developed and applied financial plans to many client decisions over the years, sometimes helping clients decide if they have enough money to move to another state, purchase a boat or RV, start a new business, fund a planned giving program, or retire in another country.
Retirement is considered successful when clients don’t run out of money before running out of time – i.e., they don’t burn through their investments before passing away.
Creating a financial plan can help individuals and families in many ways, transcending retirement planning while serving as a statistical decision-making framework. If interested in having a customized financial plan developed for you, make sure you’re working with a CERTIFIED FINANCIAL PLANNER™, or CFP®, to ensure you’re getting solid planning and suitable advice.
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Scott MCClatchey, CFP®
Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ with WWM Financial in Carlsbad, CA, an SEC-registered investment advisor. He can be contacted by phone on 760-692-5190 or by email at email@example.com .
WWM Financial is an SEC Registered Investment Advisor.
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