"If you fail to plan, you're planning to fail!"
- Benjamin Franklin
Over the years, I have talked to hundreds of investors. Far too often I find that investors start with the investments; specifically the greed of investment returns or the fear of investment loss, as opposed to a Financial Plan. Greedy investors frequently take more risk than their financial plan requires; many times that risk is not rewarded when viewed through a Monte Carlo simulation – the probability of not outliving your retirement savings. Fearful investors can be found to not take enough risk to give them a statistically significant probability to meet their long-term cash flows. Both are examples of failing to plan.
Before investors even consider putting their hard earn savings into tit-for-tat investments, they should start with the question of “Why do I need to invest in the first place?”. Well, as the quote above states, “if you fail to plan, you are planning to fail!”. I’m certain you have heard that quote, probably a hundred times. Of course you believe it and live it every day… right? I am sure you have a budget, savings and tax strategy, financial plan, debt strategy, will and estate plan, and have insured properly for life insurance and long-term care. I am also sure your investments are tuned tightly to all these topics… right?! If you are like most investors, you are nearing retirement and are scratching your head as to how you got to today… some money and uncertainty about your financial future.
Today, let’s talk about the financial plan, a comprehensive financial plan; primarily because almost everything else listed above is solved for or evaluated using this tool. Let’s not get this confused with a complimentary plan which is really nothing more than a sales tool. On the surface, it is fine because most clients do need to know if they will outlive their investments. Unfortunately, when clients receive a complimentary plan, often times advisors do not continue to plan for their clients to make sure their financial path is clear or look deeper than the investments and cash-flow projections.
At Kabarec Financial Advisors, Ltd. (KFA), we believe clients should receive a comprehensive financial plan. Below is what we recommend looking for in a comprehensive financial plan:
- Certifications and Fiduciary Standard –You should look for a fee-only, fiduciary with a CFP®, who must put your interests before their own interests.
- Cash-flow analysis with ongoing monitoring – As markets shift, expenses go up for an unforeseen reason or inflation unexpectedly rises. The financial plan is the tool that helps clients understand what Minimum Acceptable Return (MAR) they need and are comfortable to earn in order to meet their long-term financial cash-flows (i.e. retirement, education planning, legacy planning, etc.) while considering variables like budget, savings, investment risk profile, etc. and solving for a range of statistical success through a Monte Carlo simulation. That said, the financial plan should be routinely monitored, including the Monte Carlo simulation, to ensure the client will successfully reach their goals as life happens.
- Financial Manager –Financial planning should also include a financial manager (see below)– the process of routinely evaluating all areas of your financial life with you and your other key advisors (i.e. CPAs, attorneys, insurance agents). This tool helps to ensure that you and your loved ones not only have enough money in retirement, but also have planned appropriately for such things as disposition and taxation of your estate, financial protection in case of an unexpected loss or tax planning so that the IRS doesn’t erode your hard earned nest egg. In addition, the financial manager should include organizing your financial life in one place so that you have the comfort of knowing that your family will be able to find all your important financial documents and have a team of advisors ready to help them when that time arrives.