What is a Financial Plan?
By Scott McClatchey, CFP® - Senior Wealth Advisory with Ballast Rock Private Wealth
As Certified Financial Planners or CFP® professionals, we help clients create plans to meet their major financial goals (e.g., retirement planning, starting a new business, succession planning, etc). The key element to ultimately achieve these goals is a Financial Plan, which forms a roadmap to the financial goals a client has established. Although many insurance agents and investment advisors claim to be “financial planners,” they specialize in insurance or investment management and do not have the educational or experiential background required to practice true financial planning, as delineated by the CFP® Board of Standards.
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 the 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 we 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 are not, so we 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 we run, meaning once the baseline financial plan is established, we vary the level of retirement income to see how various spending levels impact the plan.
In all, our process includes running between 25 and 35 different scenarios, which collectively provide 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 do not burn through their investments before passing away.
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 do not already have adequate margin-of-safety. Do they need to save and invest more, work longer, reset their income goals, change the way they are 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 for themselves and their families. Our team at Ballast Rock Private Wealth has 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.
Creating a financial plan can help individuals and families in many ways, transcending retirement planning while serving as a statistical decision-making framework. If you are interested in having a customized financial plan developed for you, make sure to reach out to your relationship manager to get started.
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