My own financial planner shared with me back in 2002 that to plan for my finance, we use the Wealth Pyramid model. She then drew a pyramid with three layers \u2013 with wealth protection (insurance) at the base, wealth accumulation (savings\/investment) in the middle, then wealth distribution (wills\/trust) at the top. Arranging our financial plan is like building up the pyramid: from the base up. I taught my clients the same model from 2008 to 2010. What\u2019s the miss here? What does it mean to treat Protection and Accumulation separately? You cannot fully protect yourself if you are unsure how much to accumulate (set goals). Likewise, you cannot fully accumulate (achieve goals) without understanding the risks you are taking.<\/p>\n
<\/p>\n
Reservoir with Disconnected Inlets and Outlets<\/strong><\/p>\n Your financial report has a page called Cashflow Statement, that is (Income \u2013 Expenses). Another page called Balance Sheet, i.e. (Asset \u2013 Liability). Sounds professional. Unfortunately, you quickly realize these two sheets don\u2019t interact. The mortgage installment you pay monthly does not go to debit your outstanding loan, or so the report does not show. Similarly, you may not find the value of your stock portfolio that you contributed $300 monthly in 5, 10 or 15 years\u2019 time. In other words, if your net worth is like a reservoir with the water level rising and falling each year, your cashflow pipes are certainly disconnected in a typical financial plan.<\/p>\n <\/p>\n Setting Goals One by One<\/strong><\/p>\n You set goals in your plan, be it getting your first property, preparing for the arrival of the first child, and\/or retirement lifestyle at 65. Next, your planner works out the shortfall for each goal. You are told to set aside a certain budget for a saving or investment plan for each of these goals. Systematic as it seems, you realize your goals are now put into separate \u201csaving jars\u201d. When circumstances change down the road, your financial plan is less likely to help you re-allocate money from one jar to another. By setting goals in silos, there is less flexibility to optimize your resources.<\/p>\n Be Careful with Average Returns<\/strong><\/p>\n Working with your bankers and investment specialists on average investment returns of say 5% may seem correct until you hit the retirement age. Three retirees (S1, S2, S3) with $100,000 a nest egg withdrawing $7,000 per year while staying invested have very different outcomes depending on the order<\/em> of negative and positive return years. Referring to the table below, you will quickly realize the problem with the average<\/em> return.<\/p>\n Table 1. Accumulation Maths<\/em><\/p>\n Table 2. Drawdown\/ Withdrawal Maths<\/em><\/p>\n <\/p>\n The Computational Scourge of Central Provident Fund<\/strong><\/p>\n CPF formulas and rules are designed for computers, not humans. Hence, since CPF forms a sizeable portion of the average Singaporean\u2019s asset base, I call it a computational scourge. Account ceilings, contribution, and allocation rates are ever adjusting to keep tab with inflation. There is the 1% additional interest added to up to<\/em> $60K across your Ordinary, Special and Medisave Accounts \u2013 how do we account for that? Retirement and housing schemes that apply to someone presently aged 55 is different from someone aged 35. Indeed, with the exception of a few planners with great Excel skills, most planners just gloss over your CPF analysis hoping that you do not notice.<\/p>\n <\/p>\n Dismissing The \u201cIn-Betweens\u201d<\/strong><\/p>\n You set your goals and put in place a savings plan to achieve them. What is going to happen in the \u201cin-between\u201d? What if you encounter a drastic lifestyle change. What happens if your spouse stops working? Can you still finance the policy if you are laid off too? How would a 10% market correction at the halfway mark affect you? What is the impact on your rental income if SIBOR interest rate rises 1%? How would your financial plan cater for these common scenarios?<\/p>\n Over-simplified Shortfall Calculations<\/strong><\/p>\n \u201cJohn, in the unfortunate event that you are critically ill, or are disabled, how much would you need on a monthly basis? How many years do you want for this replacement income to last?\u201d<\/p>\n Are these two questions sufficient to work out your insurance shortfall? The better planners discuss with you adjusting current expenses to work out your shortfall (expenses replacement approach). But that\u2019s over-simplified. A better way is for planners to project future expenses and add in goals expense to calculate actual shortfall. Is there a way to calculate those? Yes. Are most planners really interested to help clients to calculate the actual shortfalls? Well, not really.<\/p>\n ***<\/p>\n What is the real value of a financial plan if these misses are not handled? Nothing much. What, then, is financial planning if the financial plan cannot be a reliable and accurate guide into your future? Today\u2019s decisions will impact tomorrow\u2019s reality. Without accurate insights and projections into your future, how can you make smarter and more-informed financial decisions?<\/p>\n Talk to your GoalsMapper adviser today for high-resolution, high-clarity financial planning today.[\/vc_column_text][\/vc_column][\/vc_row]<\/p>","protected":false},"excerpt":{"rendered":" As an engineer-turned-financial planner, I was quick to put my seven-year process engineering practice to use when reviewing many of my client\u2019s financial plans. <\/p>","protected":false},"author":1,"featured_media":446,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_links_to":"","_links_to_target":""},"categories":[13],"tags":[],"yoast_head":"\n![\"\"](\"https:\/\/images.goalsmapper.com\/public\/2018\/04\/coins-300x200.png\")
<\/strong><\/p>\n![\"\"](\"https:\/\/images.goalsmapper.com\/public\/2018\/04\/Picture1-300x80.png\")
<\/em><\/p>\n![\"\"](\"https:\/\/images.goalsmapper.com\/public\/2018\/04\/Picture2-300x85.png\")
<\/p>\n![\"\"](\"https:\/\/images.goalsmapper.com\/public\/2018\/04\/inbetween-300x196.png\")
<\/strong><\/p>\n