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What is lifestyle financial planning?
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Lifestyle Financial Planning is all about planning for the life you want, rather than the life you think you can afford.
The process enables us to assess the level of risk you are happy to take with investment, the way you want to invest your money and where you would like to be in the future. In short, what kind of lifestyle do you want to lead?
Let's discuss an improved way of planning to meet lifestyle goals. The key is to focus on the return needed to get you to your goal.
Most investors shy away from investments that fluctuate in value. Unfortunately this tends to mean that they invest in conservative investments such as cash which generally produce insufficient returns to fund future lifestyle.
Investors with a medium to long term horizon would do far better to focus on the return required to achieve their long term lifestyle goals rather than on the short term volatility of various investments.
Lifestyle objective > Return objective > Asset allocation required to achieve returns > Risk profile
The risk to investors is not short to medium term fluctuations in returns. The real risk is not achieving the required return over time to meet their desired lifestyle.
Take the example of John Smith, age 45, with $100,000 invested, who is currently contributing around $6,000 per annum to superannuation. John has expressed his objectives as follows:
• Wishes to retire at age 65
• Requires $30,000 per annum indexed to inflation in retirement
• Wants to ensure that income is sustained throughout retirement
By modelling John's position, his adviser identifies that John needs to achieve a return of 6 per cent above inflation to provide $30,000 per annum indexed until age 90. To achieve such a return, John's portfolio will require a substantial weighting to shares and property.
But let's say John is uncomfortable with having a substantial part of his portfolio in shares and property. The alternative is to adopt a more conservative strategy, with more in cash and fixed interest.
However, if that asset mix only provides a return of say 2 per cent above inflation, John's retirement capital will only last until age 78.
The best solution could be to modify each of the variables. For example:
• Spending a little less now and saving more for retirement
• Slightly reducing his expenditure expectations (and hence reduce his expected lifestyle) in retirement
• Slightly increasing the return objectives of his portfolio and therefore slightly increasing the level of risk he is prepared to accept
• Increasing his retirement age by a few years
Working with you to meet your goals
To secure your preferred future lifestyle you will need patience, planning and above all the right process for achieving your goal.
If you follow a systematic process of managing your finances, you will greatly increase your chances of accumulating sufficient wealth to enable you to enjoy your preferred lifestyle in the future.
In our experience there are three parts to any sound financial planning process
• The right advice
• A systematic investment approach
• A reliable reporting system
The critical role a financial planner plays in this process is to provide you with a plan that sets quantifiable financial goals and targets, which are designed to reliably deliver your preferred future lifestyle.
This task starts by working out how much you need to earn from your savings in order to fund your ideal lifestyle. The starting point here is lifestyle. How grand or modest your preferred lifestyle is will determine the rate of return that you need to achieve to pay for it.
The lifestyle you want in the future drives the return you need to generate and this in turn determines the asset exposure you need to adopt.
If you believe that the risks are too high, your financial planner will help you find an acceptable trade-off between your lifestyle plan and an investment strategy that lets you sleep at night. This trade off analysis is a continuous process that requires a close, ongoing working relationship between you and your financial planner.
To learn more about the ways in which a Community CPS Financial Planner can help you get the lifestyle you want, call us on (08) 8132 9288 in SA or (02) 6286 0517 in ACT/NSW or send us an email.
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