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There is a saying about success being a
planned event and Financial Planning is no
different. It is amazing how many people
ignore basic mathematics and statistics.
Financial Planning is immensely impor-
tant, regardless of situation. To give an
example (Obviously different countries,
different rules and assumptions):
If we could achieve an indexed annuity for
a 60 year old couple at 4%, then this means
that for a gross 40,000pa income they
would need a lump sum of 1,000,000.
For those saving for that income level, if you
consider inflation at 3%pa, then that means
the cash requirement doubles about every
23 years. So for a 37 year old couple today
wanting the inflation adjusted equivalent
at 60 will need to amass 2,000,000!
To give an example of what this looks like,
assuming a net growth rate of around 7.5%pa
(which may be considered generous), you
wouldn’t get much change out of 2,800 per
month as an even contribution over 23 years
or if preferred (again assuming 7.5%pa net
return), contributions could start at around
2,200 per month if contributions increase with
inflation at 3%pa every year for the full 23 years.
However, being armed with this informa-
tion means you can start earlier and for our
37 year old couple, if they start 10 years
earlier at age 27, then with the same as-
sumptions, all of a sudden the level premium
required is only around 1,200 per month
or with annual inflation increases to sav-
ings, starts from roughly 850 per month
- clearly planning makes all the difference.
Of course, that income could be drawn
from a number of sources such as rental
income on property or dividend income,
but only by working through the num-
bers with a Financial Planner can logic
be applied along with stress-testing to
ensure the robustness of the strategy.
Beyond savings, Financial Planners can help
make provisions to transfer the financial risk
in the case of death or a critical illness. One
need only look at the critical illness claims
statistics for cancer and heart attack to see
how frightening the numbers are. Anyone
would be hard pushed to find a major life
company with an average critical illness claim
age that is not in the 40s and this is not about
just about medical bills, this is about inter-
ruption to contributing to financial goals due
to time off work, it is about potential costs
such as home help or structural changes to
the home or even the cost of having to move
to a less demanding and consequently lower
paid job and yet, with financial planning, this
risk can at least be measured and transferred.
Furthermore, you have wealth protection and
succession planning to ensure that wealth
is protected whether that be for inheritance
or to ring fence assets from potential future
bankruptcy or divorce, a skilled Financial Plan-
ner can help with structures such as Trusts.
With so many applications, Financial
Planning is an invaluable art-form,
which is seriously underrated.
- James Sutherland
How important is
financial planning in
your life?
