Hello and welcome back to our financial literacy series on financial planning. In the last post I outlined Step #2 in the planning process – the Discovery Phase. Today we jump right into the third step in the process - clarifying your present financial status to identify potential challenges and opportunities. This is what I call - The Financial Diagnosis TM.
Gap Analysis
This step in the process is where your financial planner takes all the information that was gathered from you and begins to analyze it. Their job is to compare your hopes, dreams and fears for the future (values and goals) with your current financial reality.
To do this they’ll consider the steps you are currently taking towards your future goals and the time needed to achieve them. For instance, if you want to retire in 10 years, they’ll look at what you’re contributing to a pension plan, an RRSP, TFSA or other savings. As part of that analysis, they will incorporate all other sources of income you expect at retirement (CPP, OAS).
Through comprehensive cashflow and net worth projections (to your life expectancy) the analysis can determine if and when there might be a GAP between what you’ll need and what your resources will be able to provide.
Potential Actions for achievement
There isn’t always a shortfall that needs to be addressed. In situations where there is a GAP, that’s when the “planner hat” gets put on to find potential solutions and actions you could take to close the gap. A professional planner like a CFP® will try to provide several solutions for you to consider and not just focus on a single strategy.
Risks that May Derail your Plan
Another key area of analysis is on the various RISKs that may prevent you from achieving your goals. There are many potential risks to a financial plan, but not all will apply equally to everyone. Some of the main risks include:
- Investment/Market Risk
- Inflation Risk
- Interest Rate Risk
- Longevity Risk
- Cost of Future Health Care
- Premature Death
- Sequence of Return Risk.
- Financial Advisor Risk
Once specific risks are identified for your unique situation, your planner can determine what impact they would have on your financial situation if they happened and provide strategies to mitigate or avoid them.
The Wizardry of Planning Software
There are a variety of great software tools planners can use to create your plan, yet not everyone uses them. I believe that to do the best job for clients, advanced planning software should be used. With the more advanced programs available today, planners can provide you a much more meaningful snapshot of your current situation and more informative projections of your future outlook.
When it comes to the next step – Presenting the Plan, advanced software can also make a huge difference. This is especially true when discussing multiple “what if scenario’s” that might come up during the review of your draft plan. For instance: maybe you want to know how your outcome would change if you retired earlier, later, or only semi-retired. Another scenario might be determining the best way to purchase your next car for the best long term financial results. Would financing or leasing be better than using cash from investments?
With the best software, this can be done in real time so you can see the effect of different choices right away. It’s a great way to help you make the most informed financial decisions. This is not to say that you should only rely on software. The years of training and experience a professional planner brings to the table with respect to the human side of making money decisions can be invaluable.
Summary
All the heavy lifting in this step is done by your planner. That said, sometimes extra clarification is required to ensure they really understand your situation and goals. At True North Retirement Counsel, we add a check-in call/meeting at this stage just to make sure. It’s no different than if you were seeing a doctor for a medical issue. You’d want him or her to have all the available information before making their diagnosis, wouldn’t you?
Next time we’ll take a deep dive into what’s involved in Step #4 – The Financial Prescription™. That’s the step where you get to see the strategies that can help make your dreams a reality. I look forward to our continued educational journey together, helping you get started on your financial plan.
Until next time, remember ……..Without a Plan – It’s Only Money!
Additional Resources:
If you would like additional detail on these steps, or the broader financial planning process, check out our future posts in this series. Or you can e-mail me at info@truenorthretirement.ca and ask for our The Fearless Retirement BlueprintTM.
Also, you can visit the FP Canada website for the Canadian public at: https://financialplanningforcanadians.ca
