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  • James Tharin, CFA

Five Reasons You Need a Financial Plan

According to Wikipedia, the definition of a financial plan is “a comprehensive evaluation of an individual’s current and future state by using currently known variables to predict future cash flows, asset values and withdrawal plans.” That’s nice to know but you might be asking yourself why you might need an investment plan of some type. For starters, most people have expenses and they have to pay those expenses. So if you already know with 100% certainty what your future obligations will be and how you will fund them then you might want to stop reading here. For everybody else though, here are five reasons that I think most people need to carefully plan for their future financial needs.

1) Most people just assume that they will retire at age 65 or age 70 or whatever their preconceived idea of the ideal retirement age is. But the cost of living tends to roughly double about every twenty years. So even if you do know what your expenses are in current dollars, looking at the eroding effects of inflation on your future purchasing power (your lifestyle) can be quite eye opening. Many people can expect to live well into their nineties during retirement. That means that if you retire at age 65 then you could need your retirement savings to last thirty years or more. That time could extend even longer if you have a younger spouse or retire earlier.

2) The rules have changed. The days of the company sponsored pension are fading from the landscape of America a little more every day. It used to be that a worker would stay with one company for their entire career. At the end of their working years the company would then return the favor by taking care of the former employee for the remainder of their life. That type of retirement plan is rapidly disappearing. Some say the same fate awaits social security and Medicare too. I don’t think I would take it that far at this point but the possibility is worth considering.

3) Most people don’t know how much risk they actually need to take in order to achieve their goals. Furthermore, most novice investors don’t know how much risk they are taking with their investments. When the needed risk profile and the actual risk profile aren’t in sync, there are two potential negative outcomes. The first and most obvious negative outcome facing the overly conservative investor is the possibility of a shortfall in the size of their portfolio. However, the second possible outcome is a little less obvious. Some investors might be unknowingly investing outside of their comfort zone and simultaneously taking more risk than they need to take in order to achieve their goals. This type of investor is prone to panic and sell their investments during periods of market turmoil. In either case, the result can be the same – not enough money to fund the anticipated expenses.

4) The financial planning process can be a time to reflect on how far you have actually come in life. The process can also help you figure out how much financial work is left in front of you. By hiring a financial professional to help you create a plan you might be forced to face hard to deal with issues. Sometimes what might have seemed like an insurmountable goal can become obtainable by taking the right steps ahead of time. The key is to start the planning process early.

5) Many people have a fairly good idea of their ability to make their dreams and goals a reality and feel like they are in a position to meet all of their goals. However, the confidence and sense of relief of actually knowing where you stand can be priceless. If you find yourself in this enviable position, a financial professional can probably still make you better off than you were before you entered into the planning process by showing you better and more efficient ways to reach those goals. When this happens, other possibilities often begin to open up.

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