Many people wonder if they can afford a financial planner, or whether they even have enough money to justify one. As Simon Clifford writes, people can't afford to not have a financial planner, or a plan.
As Australia’s demographics change so too do the opportunities and challenges placed on our society. I believe the best way to approach this is through planning. Having a financial plan must improve your chances of success in life (however you measure it).
Over the past three decades the average age of Australians has increased from 30 to 37. That in itself doesn’t seem like a big deal, but it’s the baggage that comes with it that causes concerns.
Yes, our Baby Boomer generation is getting older, we all know that. The proportion of over 60s has increased from 15 per cent in 1986 to 21 per cent today, and by 2036 it will have risen to 25 per cent. However, what a lot of us aren’t aware of (although we may have suspected for a long time), is that we are now living longer; seven years longer in fact; which means we will be spending far more years in retirement. In addition to this, we’re “down-ageing”, meaning we’re remaining active later in life so are effectively younger for longer. A person today is living like someone seven years younger from a previous generation.
When you combine this with the rising cost of living, having a plan becomes far more important. Thirty years ago, the age pension met 90 per cent of your living costs in retirement, but today it will only cover 37 per cent. Thirty years ago, you didn’t need to think too much about your plan, whereas these days if you want to enjoy your hard-earned and much-deserved retirement years, you must plan for it, and the sooner you start to think about it, the better.
But it’s not just the Baby Boomers who are under pressure. Gen X and particularly Gen Y, are typically spending longer in formal education so are on average, starting their earning years later in life. To top it off, many are beginning their careers in debt due to easy access to credit which enables them to incur new expenses such as mobile phones, internet, tablets, education (HECS/HELP) and access to cheap travel.
Starting salaries for graduates are lower and housing costs are higher, hence the continual debate on affordable housing. Average house prices have increased from five times annual average earnings in 1975, to 13 times annual average earnings today. No wonder kids are staying with their parents longer!
A possible solution...
Research from Professor Mark Brimble has identified several scenarios that could occur as a result of the $3.5 trillion (and growing) wealth transfer that stands to take place over the next 20 years. His modelling shows that if this wealth is invested over the long-term (using projected return rates of 5 per cent) it could create a positive impact to the Australian economy to the tune of $11.5 trillion. Further, 75 per cent of the inheriting population would stand to receive $110,000 or above in transferred wealth.
Whatever the possible inheritance, having a plan will be the key as to whether this money is used wisely or simply squandered.
It would be nice to think that the wealth transfer will be invested for the future, however, I suspect that a more likely outcome will be some sort of compromise as people pay down some debt, help the kids, invest some and take a much-needed holiday. The most important part to the whole deliberation is having a well thought out plan.
“Live the dream”, a paper recently published by social research Mark McCrindle on behalf of the Financial Planning Association (FPA), identified that people who plan are far more likely to live the life they envisaged than those that don’t.
Almost 1 in 4 Australians believe they are definitely or mostly “living the dream”. What is it about these people that enables them to achieve this?
- They have strong personal habits
- They dream about the future
- They plan and stick to the plan
- They have high levels of self-belief
- They seek out advice from others
- They have fewer regrets
The first piece of the puzzle is to work out what it is that you want to achieve in life, what will make your life a success, and what does “living the dream” look like for you?
This is where a financial planner can help. In my experience, most couples haven’t sat down and mapped out their medium and long-term goals. And if they’ve done any planning in the short term it’s usually somewhat disjointed and at the expense of other longer-term goals that haven’t been taken into account. It’s all just too hard.
A financial planner can help take you through the exercise of mapping out your big goals in life, to show what living the dream really looks like for you. Putting aside your assets and financial position, they will help unlock your dream space and identify in great detail what you want your life to look like over the next one, three, 10 years and beyond.
Once you’ve gone through this exercise, it’s then time to start thinking about the financial perspective. What are your current assets and liabilities, how much do you earn, what are your basic living expenses and what are your dream expenses? What is your budget, do you even have one, how important is safety and security, what is your investment experience and how educated are you when it comes to investing? These are just some of the questions an adviser will work through with you.
A good financial planner will take all of this information on board and create a financial and lifestyle plan that maps out your likelihood of success. It will spell out in great detail how to achieve the things you want, when you can retire, how much you need to be saving, how to pay down debt, and how to protect your wealth with insurances. It will also cover where to invest, what to invest in, how much to put into superannuation, how much is enough, what level of risk is associated with these investments, how this relates back to your own risk profile and so much more.
But they won’t stop there. They’ll also educate you so that you feel like you’re making a completely informed decision. They’ll help you implement the plan. Most importantly, they’ll join you on the journey, reviewing the plan every year, holding you accountable for the things you said you wanted to achieve, adjusting the plan when curve balls come your way, or when you simply change your mind. They’ll keep you on track to “living the dream”.
Another part of a good financial planner’s process will be to get you thinking about your own estate plans and your own wealth transfer, so that the right assets go to the right beneficiaries at the right time!
Yes, there is a massive wealth transfer that will take place over the next 20 years and many Australians will benefit. Just how many will benefit and by how much, will depend upon planning.
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