Things a Financial Plan Should Tell You – and Things It Won’t

A financial plan is like a road map.   A map will tell you where you are, where you want to go, and the route to take to get to your destination.  But the map is not the territory and sometimes the roads on the map are potholed or washed out, so alternate routes are required.  And sometimes you can’t get there at all.

So what should a financial plan tell you?

1.  What is my net worth?  A plan that doesn’t tell you where you are is no plan at all.  It’s the starting point where all plans begin.

2. What is my goal?  If you don’t know where you’re going, any road will take you.  Goals are usually described as the income it will take to provide you with the lifestyle you desire.

3. How much money will I need to retire?  Keep in mind that there are a lot of assumptions built into this number such as your other income sources, your estimated spending during retirement, the withdrawal rate that will not deplete your money during your lifetime,  the rate of return you can expect on your money during retirement, and many others.

4. What rate of return will I need to meet my retirement asset goal?  As you put money aside for retirement there are two components that influence how much you will retire with: the amount you put aside and the growth of those assets.   You have more control over the amount you save than the rate of growth you can expect.   That is one reason risk control is vital.  You don’t want investment decisions to negatively affect your savings rate.

5. What is a safe withdrawal rate?  There are academic studies that use historical data that provides some guidance.  But the rate your money grows at the beginning of your retirement has a disproportionate effect on on the amount of money in your retirement account.

6.  What is the probability that I will run out of money during retirement?     Some plans use Monte Carlo simulation to give you a probability of your running out of money, but beware of assumptions built into these simulations that may give you a false sense of security.