Once your objectives have been agreed, personal data gathered and a lifetime cash flow forecast produced, a financial plan can be constructed to calculate the levels of savings and investment return you will require to meet your objectives.
It is easier to structure a financial plan to achieve these goals if you set a time scale for attaining them and a monetary figure, so you know when they have been achieved. This may sound obvious, but is not always done.
If you say you want to save money, so you can afford to send your children to private school, this is not sufficiently detailed information to help with drawing up a financial plan. Examples of the other information required include how many children will attend private school, when your children will start school, how many years they are likely to spend at private school, the level of school fees you will have to pay, your income, other expenditure and current savings.
You need to be specific even for retirement planning. How much is sufficient annual income in retirement? This will vary from one person to another and may change the nearer you get to retirement. How can you draw up a financial plan if you do not know how much money you are trying to save and the returns you need to generate from your investment portfolio?
In this case, the first step is to decide how much income you will need in retirement and at what age you would like to stop work and then work backwards from there. If you want £40,000 a year at today's levels of interest rates you will need a savings pot of more than £1 million by the time you retire. Of course, you will need to take account of inflation eroding the real value of this pot, if inflation rises faster than the growth in your investments.
By establishing that you will require more than £1 million by the time you retire, you can determine how much you will have to save each month, given your existing income and savings and the degree of investment risk you will be prepared to take to achieve this objective by the age at which you wish to retire. The other factor that you will need to consider is life expectancy. It is hard to know how much money you need to save without knowing how long it will need to last.
Wealth managers have mortality tables that will indicate your age expectancy based on, among other factors, your age, health, occupation and sex. It is best to expect and hope that you will live longer than the projected age.
The above example, however, is a simplified summary of retirement planning. This is because you need to take account of your other goals as well. Each objective cannot be attained in isolation. You need also to evaluate likely expenses in retirement, which can be separated into different types.
The first category is living expenses. In evaluating living expenses you need to take account of whether they will rise in line with inflation. Some expenses will rise faster than inflation, some at a slower rate and others in parallel with the consumer price index. These expenses will be with you for the whole of your life. Examples of expenses that have been rising at a faster rate than inflation include council tax, school fees and nursing care costs.
Other expenses have fixed lives and may not be linked to rises in the rate of inflation. Examples of this include school fees and fixed rate mortgages. Your repayments may come to an end a few years after you have retired, or even before. Such fixed term expenses mean that you cannot simply assume a rate of inflation of 2.5% a year, for example, to calculate how much income you will need 10 years after retirement.
The last category of expenses comprises those that will rise with inflation, but will not last your whole lifetime. Examples can include holidays, cars and weddings.
As was said earlier, you will have many different objectives in life that will have to be fulfilled over varying periods of time. It is unlikely that you will be able to fund fully all of these objectives at the same time. Therefore, you will have to prioritise your goals.
Drawing up your priorities is really your responsibility, although your private wealth adviser should assist you in explaining the consequences of your decisions. For example, if you decide not to send your children to private school and insist on them funding their own university education, then you will have more money for a holiday home and retirement, as well as your emergency account.
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