We are “proper” financial planners, by which I mean our job is to help you to build a financial plan that works for you and your family. We bring your expertise and ours together in an iterative process of questioning, listening and understanding.
Your expertise is you – what makes you tick, what you do and don’t value, what is and is not important. We have expertise about financial matters that most don’t. Our responsibility is to share that with you truthfully, helpfully and kindly as well as become as expert (almost) in you as you are.
To help understand you better we model different scenarios with our clever software. We do this to gauge your reaction to the ways in which life might unfold depending on what happens.
There are nice things to think about – buying a holiday home, stopping work earlier, having bigger holidays, new hobbies, etc. And challenging things – dying early, not being able to work, needing long-term care, etc.
The questioning, listening and understanding part of the process is clear and obvious. On the other hand, the modelling part needs careful handling.
For modelling to be valuable, the inputs and assumptions must be good. If not, the output will be bad or – worse – entirely misleading. Crap in, crap out.
That is why safety margins are important; only with prudent assumptions can we have faith in the output.
For example, assuming ongoing investment returns of 10% pa (recently easily achieved), everything looks magnificent. But we can’t expect those returns to persist, we expect about 5-6% pa on average. But when it comes to modelling your future, we want more prudence so we assume 3.5% pa on average, or 0.5% pa above inflation.
That is a major safety margin – assuming returns 30-40% less than we expect. If your models look good at those levels, then we’re quite content.
Other safety margins include:
- Never counting on receiving an inheritance.
- Living cost inflation of 3% pa (higher than the long-term UK average).
- Cash earns 2% pa less than inflation.
- Routine spending not falling (we expect you to spend more than you probably will).
- Additional spending in the first years of your after-work life – holidays, treats, hobbies, etc.
- Needing long-term care to the tune of £150,000 (in today’s terms).
- Not relying on downsizing to fund your after-work life.
Only prudent assumptions give you confidence in your plan.
Imprudent assumptions are worse than no plan at all.