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PORTFOLIO STRATEGY

The financial plan: Your can't-lose retirement investment Add to ...

Thanks to our financial plan, my wife and I know we have enough money to last until age 90 and beyond.

If you can’t say the same, then consider getting yourself a plan. It’s the can’t-lose retirement investment.

Our plan was created by Matthew Hall, a chartered financial analyst (CFA) at Exponent Investment Management in Ottawa. Mr. Hall suggested he create a plan at no charge for us as a demonstration of the value in this service, and I accepted on the basis of reporting back to you on the results.

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The plan we received consists of 18 pages of analysis based on face-to-face meetings and documentation we supplied on our day-to-day finances, our debts and our investments and pensions. Into it, Mr. Hall built our eventual plans for downsizing our home (tough to do as my wife and I disagree somewhat on this), as well as our projected cash flow needs, our intention to keep working on a part-time basis for several years and our need to replace our cars over time.

I’ll summarize the benefit of this plan in three words: Peace of mind. Based on our current assets and Mr. Hall’s projections of our future worth, we will have enough money to live comfortably. The numbers are all mapped out for us on a year-by-year basis using conservative assumptions about investment gains (example: 5.5 per cent annualized gains from Canadian stocks).

A financial plan is worth having whether you’re a do-it-yourself investor or have an adviser. Expect a cost of somewhere between $800 to as much as $3,500 if you pay directly. If you have an adviser managing your investments, a plan should be part of the services covered by the fees and commissions you pay. Mr. Hall said the cost of a financial plan is not tax-deductible.

A Portfolio Strategy column from last year showed how many plans end up ignored by both investors and their advisers (read it here). A theory: Plans are being ignored because they require a commitment to saving that some people don’t want to make. At least they have a road map to refer to when they decide to get serious about saving.

My sense from reader e-mails is that a lot of people would like financial advice without a sales pitch to buy investments. That’s exactly what you get from a financial plan produced by a fee-only financial planner, which is someone who gets paid an hourly or flat rate for her expertise and does not sell investing products. Some will also manage your investments, but that’s a separate transaction. The best resource for finding a fee-only planner can be found on the MoneySense magazine website at moneysense.ca/directory-of-fee-only-planners.

Let’s be clear that the title of financial planner can be used by anyone, with no regard to credentials, experience or expertise. I see more and more people getting into the business of financial planning or coaching with good intentions, but no formal training. To increase your odds of getting the best work done on your behalf, deal only with planners who have credentials. Look out for the certified financial planner (CFP) designation, the registered financial planner (RFP) or the personal finance planner (PFP). Mr. Hall’s CFA is an elite designation that combines training in investment management and financial planning.

A recent Portfolio Strategy looked at some online tools for assessing your own retirement readiness (read it here). I’ve tried them all and think a properly done financial plan is more detailed and thus better.

In our case, Mr. Hall tailored the plan to reflect that:

  • We’re not too far away from paying off our mortgage and thus will be able to ramp up our retirement saving considerably.
  • Our boys – ideally – will be done university in 2020, thereby allowing us to divert money from their registered education savings plan to our retirement plans.
  • We will downsize to smaller accommodations in about 10 years’ time and use most of the proceeds from selling our house in acquiring our next home.
  • My wife and I have different pension plans and thus should think about having different asset allocations in our RRSPs.

The plan includes a net worth statement, which is a snapshot of how much our assets exceeded our liabilities when the plan was done. As noted in a column this week (read it here), net worth is more or less trivia that you write in pencil. House prices and investments have run up a lot lately, and you can’t count on them maintaining current value in the short term. Still, it’s kind of a buzz to see that we have accumulated a lot more in assets than we have in debt.

The plan also includes a to-do list with dates starting immediately and running to 2026. Among the first items is a strategy for expediting the process of paying off our mortgage.

The most basic function of a financial plan is to see whether you can reasonably expect to have enough money in retirement to live the kind of lifestyle you want. In our case, Mr. Hall showed how our savings gradually decline after retirement but are nowhere near depleted by 2055, when I’ll be 93, my wife 92.

I asked him for a plan focused on our retirement outlook. The accompanying chart shows what eight other financial planners across the country would charge for something similar. Expect to pay more if you want a more complex analysis including matters such as estate planning, taxes and insurance. Yes, the cost of a plan can be steep. But the return on investment is big.



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A financial plan for retirement: What's the cost?

Eight financial planners from across the country were asked to say what they would charge a couple in their late 40s or early 50s who want a comprehensive plan dealing with retirement, as opposed to estate planning, taxes and insurance. You can see from these quotes that the cost and scope of work done varies widely among planners. This suggests people should be able to buy a plan that matches both their needs and their budget.

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