Retail Distribution Review (RDR): Why financial planning is so important?

Recently the institute of financial planning promoted financial planning week, there were some excellent blogs which came out of this. One of these blogs came up with three steps to financial heaven:

•  Define it
• Cost it
• Fund it

Often especially when we are doing our investments ourselves we go straight to fund it i.e. we go straight to the solution without defining what it is being used for. So for example, we might buy a pension product because we think it will provide for us in retirement but actually we haven’t defined what we need and the cost to provide it. If you don’t know these fundamental elements then how do you know you have funded it? I believe this is why many people are disappointed when they come to retirement. 

I am very much in favour of having goals, if we look at the main goal of retirement then before we jump to funding it we need to define what we want, what will it look like?

Below are some questions you might want to ask yourself before you look to fund your retirement:

1. When are you looking to retire? Be realistic in your expectations
2.  Will it happen as a single major life change or a gradual transition? So you might decide at 60 you want to slow down but don’t want to stop fully working
3. If you are looking at a gradual transition is this going to be with your job, or will it be a new job or even a new business
4. Where will you live? If you live in say London with a house worth £600,000, will you move out of London? Will you downsize? Will you move to an area where house prices are cheaper?
5. What are you planning to do? What are your plans for retirement; some people have plans to travel, to go on holidays, to spend time with grandchildren or children.
6. Who will you do it with? Are you married, divorced, have a partner, are there dependent children or other dependents
7. How much will it cost? This is a difficult one to consider but assuming the mortgage is paid down, how much money do you need to fund what you want to do. This could be a monthly income and emergency savings
8. Considering risk – this is very difficult but this is crucially important:

a.       How much risk are you prepared to take to achieve your goals?

b.      How much risk do you need to take to have a reasonable chance of achieving sufficient growth to achieve your goals?

c.       How much risk can you afford to take?

The last question is possible the hardest and will depend on timescales to retirement, and the plans you have. One fund manager said to me that his strategy is a get rich slowly strategy. This is worth considering because often we want to make money quickly but actually a carefully planned strategy can deliver better results with less risk.

The point which the person who highlighted these in his article was making was that financial planning is not about the product or end solution it’s about a service which looks to achieve and maintain your desired standard of living.

So when we consider the fee we are paying perhaps we need to consider less about comparing against the end solution but against the service and decide whether this is worth the money we are paying. In many cases I would argue that it is.

(Parts of this blog are adapted  from an article and blog written by Alan Dick, Managing Director of Glasgow-based Forty Two Wealth Management and vice president of the IFP)