I don’t need a financial plan – I have policies in place. This is a common, albeit misguided, response by many when probed on the all-important issue of financial planning. Ironically, the existence of these so-called policies – invariably sold by insurance brokers for hefty commission payments – may be the very reason a financial plan is needed. Financial planning is an all-encompassing, holistic process that looks at a person’s entire situation through the lens of all relevant financial, tax and legal tools available – overlaid by the client’s specific goals and dreams. There is no direct relation between the quantum of one’s policies and the appropriateness of one’s financial plan. In fact, the converse may well be true. In the first instance, a well-drafted financial plan should be focused on advice as opposed to products. Secondly, a sound financial plan should aim to consolidate all policies and investments into a stream-lined solution that attempts to reduce the fees and commissions payable by the client whilst at the same time increasing the value to the client. Lastly, and most importantly, a financial plan should be a personalised blueprint that addresses all possible foreseeable and unforeseeable events that a client may face in their life-time, using sound scenario planning principles to identify areas of risk. Our formula for holistic planning is based on four broad areas which are all underpinned by the indomitable question: What if?
Foreseeable life events
What can you reasonably expect to happen during your life-time and how can you plan for each eventuality?
With it being the desire of most people to live a long and happy life, this area of the plan isolates those events that can reasonably be expected to happen during the course of one’s life time. It is anticipated that most people will suffer minor health ailments and may be hospitalised for general, non-life threatening procedures during the course of their lives. The natural stop-gaps for these anticipated events is to put appropriate medical aid and gap cover in place, whilst at the same time taking into account familial history, demographics and affordability. Other foreseeable events that can be planned for include marriage, property purchase, children’s education and travel, all of which necessitate short-to-medium term investment advice. Tax is an inevitable part of earning an income, and tax planning should be a regular line-item in one’s annual financial review. With ever-increasing human longevity, retirement planning which assumes a life expectancy of age 100 is now considered the norm. Retirement funding is a complex and heavily legislated area of financial planning and, regardless of earnings or net worth, a workable retirement plan should be drafted with expert advice from a retirement expert. These events all fall within the realm of foreseeable life events that can be adequately prepared for.
Unforeseeable life events
What are the events that can blind-side your plans, and how do we protect you?
This area of the financial plan is the catch-net for life’s curve balls. Through a systematic process of What if? questioning, and without using fear as a driver for action, careful consideration is given to possible eventualities such as temporary incapacity (such as a hairdresser suffering from carpal tunnel syndrome) or permanent disability (such as a surgeon with debilitating arthritis in his hands). Mental illness such as chronic depression, anxiety or bipolar disorder can have detrimental effects on one’s potential to earn an income, and mechanisms should be put in place to protect one’s income should earning potential be compromised in any way. As morbid as it may be to explore and understand the implications of divorce, retrenchment or personal tragedy, it is absolutely essential to play-out these scenarios through the lens of scenario planning to ensure that one fully understands and protects against these eventualities.
Foreseeable death (old age)
How do we plan for the fact that you may live to 100 and what will your legacy be?
One of the benefits of living a long and healthy life is being able to timeously plan your last wishes and carefully craft one’s legacy. Together with the drafting of a Last Will & Testament, this area of financial planning involves calculating estate duties and estate costs, as well as bequeathing one’s assets accordingly. The luxury of time also affords one the opportunity to put funeral and burial arrangements in place so that your loved ones are not left questioning your wishes after your death. With some careful thought and sound financial planning, the winding up of a deceased estate need not be the cause of any administrative or financial burden for your loved ones. The gift of time allows one to craft one’s own timeless legacy.
Unforeseeable death (untimely death)
What happens if you were to die an untimely death and how can we prepare for such an eventuality?
The last quadrant of the scenario planning matrix is aimed at identifying areas of exposure in the event of an untimely death. Fear-based sales of life insurance policies often result in many people being hopelessly over-insured in the event of an untimely death, and yet completely underfunded for a long and would-be happy retirement. As far as planning financially for death is concerned, it is an exact science. Understanding what one’s spouse and children would need financially in the event of your death is a budgeting exercise that is then capitalised into a lump sum amount. In general, as one’s wealth accumulates, debt decreases and children become financially dependent, the need for life cover reduces and eventually becomes obsolete. Other tools that can be employed to negate the effects of an untimely death include making provision in one’s Will for guardianship of minor children, and the setting up of a testamentary trust to protect the assets bequeathed to one’s children. The drafting of a Living Will can also provide invaluable guidance to one’s family and medical doctors in the event that artificial life support is being used to sustain your life. For business owners or shareholders, business succession plan forms an integral part of this planning process; and all business assurance needs should be analysed as part of one’s personal financial plan to avoid overlap and over-insurance. The incorrect structuring of one’s business assurance and shareholder agreements can have devastating effects on one’s succession planning, and expert financial planning advice should be sought.
At the end of the day, financial planning is less about money and more about being the intentional author of your own future. Our advice is to let your financial plan be the first chapter in the book of success.
Have a wonderful week!