A Financial Planning Christmas Carol

Maybe it’s the holiday season, but financial planning makes me think of Charles Dickens’s A Christmas Carol.  Remember how Ebenezer Scrooge was visited by 3 ghosts—Christmas Past, Christmas Present, and Christmas Future?  It gave him the opportunity to witness, from a reality-ringside seat, a view of where he’d been, where he is presently, and where he is going if he continues with his present ways, as well as an opportunity to change things to achieve a different kind of future.  For me, this is the great benefit of financial planning.

Our prior spending and savings behaviors have led us to where we are today, financially speaking.  The first thing planning does is reveal to us a current and realistic picture of what our past has built.  The Balance Sheet lays out the different types and values of assets we own as well as the debt we owe to others, the bottom line being our “Net Worth.”

A detailed Cash Flow captures our current sources of income (inflows) and expenses (outflows).  The outflows include our savings to retirement, education, and other investment accounts as well as debt payments and current living expenses.

But the great thing about planning is, it doesn’t stop with the past or the present.  It projects out our future based on where we are today, and illustrates different outcomes based on changes we might make in our saving, spending, investing, and risk management strategies.

The Cash Flow Outlook provides a detailed projection of cash inflows and outflows over any future period such as the first 5 years of retirement.  A summarized cash flow projects out total inflows, outflows, and surplus (or deficit) until projected end of life.

A very helpful analysis is the projected Retirement Income and Expenses.  This report shows annual cash flows for the duration of retirement, breaking down projected income from Social Security, Earned Income, Required Minimum Distributions (RMD), and proceeds (distributions) from Qualified and Non-Qualified accounts, as well as projected expenses.

Another extremely helpful analysis is Retirement Need and Investable Assets.  This report shows a yearly summary of projected incomes, expenses, asset withdrawal needs, and financial asset balances across our investment accounts.  This allows us to see where the money to fund our lifestyle will come from, how much our investment accounts are projected to earn, how much we’ll need to take from them each year, and what our investment assets will be worth at the end (whether they will last for our lifetime and what will be left over at the end to pass on to the next generation).

For those whose saving, spending, and investing habits are in line with their present and future desired lifestyles, the financial planning view of “Christmas Yet-to-Come” validates and reassures.  For those for whom the future financial picture is not where they want to end up or even not sustainable, the plan gives hope!  Your financial planning professional can recommend changes—such as debt restructuring, expense reduction, additional savings strategies, different investment strategies, just to name a few—that can lead to more successful outcomes.  And, those recommendations can be illustrated so you can see what happens to future cash flows and asset accumulation and depletion if you implement the recommended strategies.

A good financial plan is a nice and helpful Christmas ghost!  By detailing and analyzing the past and present and projecting out to the future, a financial plan delivers peace of mind and a realistic, achievable set of goals and milestones to attain and/or maintain financial wellness.