Financial Planning – More than just Pensions and Investments!

Death and Life - Gustav KlimtThere is more to financial planning than just pensions and investments.

Long before I became a financial planner while growing up working in my parents newsagents, I saw the importance of financial planning no matter what age a person is.

When I was about 18 or 19 a married couple I knew who were customers of the shop were killed in a car crash. While their death was devastating enough for loved ones, the agonising part was that they had a 3-year-old daughter. Each half of their extended family wanted to do the right thing by taking custody of the young girl. The situation had the potential for much ugliness among in-laws, until it was discovered that the couple had created a will only months before their death. In it the wife’s brother was named as their daughter’s guardian. And at that point, because the young parents’ wishes were clear, all arguing stopped.

I don’t care if you don’t have two cents to rub together, if you are parents of small children you have to have a will and name someone to be a guardian for your children. You have to take care of your children.

Having a will is just one aspect of financial planning that depends on where you are in life. Financial planning is much more than just investments and retirement savings.

While everyone’s situation is different and their planning needs are not entirely age-specific, there are some generalisations that can be made.

For people in their 20s—when many people are just embarking on careers and are financially beholden to no one but themselves—several aspects of planning are important whether they have children or not.

For starters, building an emergency fund worth three to six months of your salary, saving for your first home, thinking about saving for retirement and getting a handle on what you’re earning versus what you can spend. What I usually find is that it is about teaching them how to save money and develop good financial habits.

Part of the challenge is helping young clients determine their spending priorities such as getting them to see that if they buy the newest smartphone, they won’t be able to go on a holiday or if they want that really flash car, they might not be able to buy a house for a while.

I also encourage people to start saving for retirement as early as they can, especially to the extent they can take advantage of any matching employer contributions to their plans.

Having Income Protection is also important. If you are unable to work due to illness or injury… you won’t be concerned about saving for retirement, you’ll be thinking about how to deal with what you have. How would you survive financially if your income stopped?

According to recent claims statistics from a leading life insurance company in Ireland, 26% of the claims were as a result of orthopaedic / back injury claims and 22% were for psychiatric claims.  This shows that nearly HALF of all income protection claims paid out were as a result of back problems and stress related issues – both very common conditions in Ireland.  The next 2 biggest reasons to claim were cancer at 14% and cardiac issues at 8%.

35% of the claims in payment have been receiving benefit from their income protection plan for over 5 years!

If you end up being unable to work due to injury or serious illness, an income protection policy typically provides you with a portion of your salary up to a maximum of 75%—up to certain limits with generous tax relief on the premiums.

Also important is creating powers of attorney. This means giving someone the authority to handle your finances if you cannot, and choosing someone to make important health-care decisions if you are unable. And yes, if you have children, make sure you have a will.

For people in their 30s, life can get a bit weird and it is often ha case of having to rein them in when it comes to spending. The biggest challenge for them is that it often becomes about keeping up with the Joneses and this usually means spending money on things that have no value other than how others view you.

A big part of my job is to try to get people to make better decisions and highlight the consequences of their decisions.  Really getting clients to think about things like buying a car or house they can’t afford. These purchases represent too much of their income and that spending the money on those things means they won’t be able to meet other financial goals, like putting money toward retirement. When you lay that out, they start realising it maybe isn’t such a great idea.

Another life change that 30-somethings often face is having a spouse or partner, a house and children that brings new complications into their financial planning.

At that point in life if they are a traditional family or have children, life insurance definitely comes into play. If you have a mortgage your bank generally insist it be covered with mortgage protection, but any amount you need after that depends on how much your survivors would need to replace your income in order to maintain the lifestyle they are accustomed to.

When purchasing life insurance, the question really isn’t how much you need, but how much of a lump sum your family will need at the time of your death, which depends on two variables:

1)    How much will be needed at death to meet immediate obligations?

This amount takes into account all final expenses: uncovered medical bills, funeral and estate-settling costs and outstanding debts to name a few.

2)    How much future income is needed to sustain the household?

This is the number you’ll arrive at after calculating the “present value” of cash-flow streams your family will need after your death to give you a lump sum figure.

When people are in their 40s, new concerns come into play. Their children might be getting close to adulthood, which means third level education costs might be on the horizon.

By this point, it’s wise to have started thinking about how to pay for your children’s college education. I must emphasize though that it is more important to save for your own retirement than your children’s college expenses as financial assistance may be available for college but not for your retirement.

People in their 50s are in the home stretch of retirement planning. If they have not tended to all of the things they should have at a younger age, now is the time to prioritise them.

And as far as retirement savings go and how to divvy up your assets, it’s all about risk tolerance and time horizon. I am loathe to say that a 25-year-old should have more exposure to equities than a person on the verge of retirement. What it really depends on is to what extent a client can stomach the volatility of the markets and their understanding of risk = rewards.

I believe in the benefits of financial planning and I urge everyone to go through it. Your very future depends on the choices you make now and to go through life [without planning] is a dangerous way to live.