The process of financial planning is like any planning process…
- you find out where the client is positioned today,
- work with the client to establish goals whilst
- understanding the constraints to reaching those goals, and then
- design, present and implement a strategy to reach those goals…which is then
- reviewed on a regular basis..therefore go back to Step 1.
There is one very simple tool that can contribute to efficient answers to each step…but it rarely gets the detailed attention it deserves…the expense budget.
A detailed understanding of an expense budget can provide all of the following information with far greater clarity than without it…
- calculate excess savings…which can be used for tax effective salary sacrifice to super or simply a savings plan outside of super
- understand discretionary expenses that can potentially adjusted to provide for greater excess savings, and finally and most powerfully,
- understand the true cost of basic lifestyle and desired lifestyle which can be then used to calculate a retirement income goal
So the expense budget actually provides some for the answer with regards to the client’s current situation (i.e. expenses…der); constraints (i.e. savings limits) and then the calculation of goals (i.e. base and desired lifestyle cost which can be used for retirement income).
Possibly the most asked question in financial planning is, “how much money do I need to retire?” and a detailed expense budget can provide this…you can exclude all of the expenses that are unlikely to be present in retirement (education costs, mortgage, etc); and then add in a couple of retirement costs (additional healthcare and holidays) and using that figure using lifetime inflation linked annuity rates can provide the goal in today’s dollars. Of course, you may believe you can achieve the retirement income goal with a smaller amount but you can hardly provide a guarantee like a life company can and I’m not suggesting investing in lifetime annuities…just using their rates for retirement asset goal purposes…so inflation linked lifetime annuities it is.
Then the strategy becomes a matter of mathematics whereby you work out the current retirement assets, current savings potential, and using the retirement income goal(s), the planner can calculate the required annual return for achieving that goal(s). Once that rate is determined, then an appropriate investment strategy can be designed…therefore providing an efficient goals based strategy for recommendation.
The final step is the ongoing client review, whereby the initial inputs are reviewed, and if the required rate of return increases or decreases then the investment portfolio can be adjusted accordingly…as far as I’m concerned no need to accept greater risk than necessary to reach goals…so an efficient solution is recommended at each review. Keep in mind as interest rates change so too will the amount of assets required to provide an inflation linked after tax retirement income…therefore the goal is a moving goal and it must be continually recalculated.
If these steps are taken, then investment strategy becomes a matter of simple design using current interest rates and mathematics, based on needs first with the chase for higher returns, via which asset class will outperform, can become a secondary issue. Oh yeah…the risk profiling is used simply to ensure the client has the tolerance, understanding and capacity to follow the strategy. What a simple way of differentiating a client solution.