If we’re deliberate and intentional about our finances, then we’re likely planning for the future to some degree. That might be fairly high-level, with some outline hopes and aspirations and a general sense of saving towards them. Or it might be much more granular, with target dates, assumed growth rates and tactical asset allocations for our investments.
I did a whole season on planning which you might find useful; you can find it here. Whenever we plan, we need to set assumptions that are realistic, and really, we should be conservative in those assumptions.
Whenever I’m planning with and for a client, I always set conservative assumed rates. So lower growth rates than we might actually expect, for example. Or higher inflation rates, or lower earnings growth if they’re still working. I think that good planning is based on decent assumptions, so it’s worth doing some work on what those should be.
Aside from the numbers though, we are making some qualitative assumptions such as ‘I will always be able to work and earn a rising income’. What if you can’t? When it comes to income, then you can protect it if you are unable to work due to illness or injury – that’s called income protection insurance and I covered it in a couple of previous episodes, which are here and here.
You can’t insure your income source being made obsolete though, either by robots or some other means. So should we consider applying diversification to the area of our income? Perhaps by starting a side hustle or second job? Or developing skills in our spare time that we may be able to draw on in future, maybe? Is it dangerous to assume we can always do what we are now?
I don’t want to make anyone paranoid, and I really don’t think that most of us will need to lose sleep over this, but it’s something to think about and be intentional about. When it comes to planning into retirement, there are a couple of planning risks to be aware of.
One thing I often see is too-conservative assumptions about spending. So, when I’m planning for people, I’ll always ask them to analyse their spending and try to project it into retirement, knowing that they’ll have a ton of time on their hands. Whatever figure they come back with, I’ll add a significant margin to it, and particularly if I get the sense that they’ve guessed.
Some clients come back with a robust analysis of the average spends in various categories over the last three years, and you just know they’ve tracked everything. Other clients say, ‘Umm, I’m not sure, about three grand a month?’ Those clients I tend to ramp up their projected expenditure quite some way!
And hardly anyone considers lump sum expenses like changing the car, or having to help out a child who has got divorced, or whatever. My job as an adviser is to make sure my clients’ plans are intelligently built; and sometime that means speaking straight to a client who think they’re going to spend one level when it’s clear they’re going to spend more.
Whatever assumptions you are making, you need to stress-test them to see if the plan still stacks up under that stress. If it doesn’t then you might need to plan for contingencies.
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