In this age of ever-expanding technology, the data-gathering process for a financial plan has gradually become less complicated and intrusive. Computers can now pull the latest values of your 401(k) plan and bank account balances into various evaluative software programs, and update them automatically. We can model future returns on a variety of different portfolio combinations with a few mouse clicks.
But a great deal of hard work still falls on the shoulders of financial planning clients. People still have to figure out how much they expect to spend in retirement, and how much income they expect to need to pay their living expenses. You have to make decisions about your future lifestyle, and estimate the costs of each component part, often by taking a closer look at your current expenses than you ever have before.
And this, of course, is complicated by questions like whether you plan to work during the traditional retirement years, what hobbies you plan to pursue, whether you’ll keep your current home or downsize, and how long you’ll live. You look at the list of questions and realize that anything you write is an estimate or an attempt to quantify something that you cannot possibly know with precision. You can be forgiven for wondering: what’s the point of all this effort? Why should I have to go through with this? Can’t we just create a workable plan using current account information and what we know today?
The answer, alas, is no–and the reason is interesting, and not always well-understood. The truth is that being able to live a successful financial life, and meeting your goals, is far more dependent on a person’s behavior than his or her financial planner’s. Even if the financial planner were to get an extraordinary rate of return on your investments over a long period of time (and this is usually not possible), how much you save and invest from your monthly budget will still be a more important factor in how wealthy you will become. And the amount of your future expenses will be more important still in whether you’ll be able to fund your future lifestyle.
In addition, and related to this, it is important to know whether the amount you’re saving and investing today is likely to be enough to meet your future expectations. If not, it’s better to make a course correction now, before it’s too late.
In addition to that, it’s always better to have an understanding of your future expectations, so you can start making concrete plans for that part of your life when work becomes optional. For some people who enter their retirement years and look back, this advance planning and preparation turned out to be the most valuable part of a financial planning relationship.