It is more common than not these days to see clients who have a financial plan in place and have worked with an adviser to get an idea of whether they can reasonably expect to achieve their financial goals. Those plans vary in complexity with each client’s situation, including assets and goals, which are widely different among people who seek planning assistance. Although these plans are intended to provide folks with confidence about their financial future, one question you should be asking is whether the plan can be relied upon.
It is relatively simple to take an assortment of existing assets and expected cash flows and figure out how that will do over time in funding goals. Applying different allocations to the investment portfolio is also fairly easy to accomplish and, voila, there you have it. But is it really all that straightforward and easy? Underlying any plan is a series of assumptions, factors for which we allow in the plan and which affect its results greatly.
For the initial plan, assumptions are often easier since we know what is happening today and the plan necessarily uses today as the baseline. There are the general – inflation, taxes, interest rates, market performance – and the specific – savings rate, retirement age, income, among others. The plan is based on these and other assumptions and is useful to us when that plan is created. However, most of these items change over time, perhaps drastically, and this underscores the need to revisit your plan on a regular basis.
The assumptions that were valid indicators at the time we started may well no longer be such once some time has passed. You will want, or more accurately, need to revisit those assumptions on a regular basis. With a little hindsight, you can see how your original assumptions have played out since the first plan was created. Perhaps you did better than you expected or maybe worse. Either way, it is unlikely today that you are precisely where the original plan said you would be two, three or more years ago.
Checking your assumptions and resetting your plan to meet current expectations, goals and conditions is an essential part of keeping on track with your financial plan. That is why it is good to have regular reviews with your adviser and ensure that your plan continues to apply.