Financial Planning is a weird business. If you ask most people if getting a financial plan is a good idea, I suspect they will say it is. If you then ask them exactly what a financial plan is, you will get some mumbling about retirement age, taxes, and a quick change of subject. It’s the same way I view a car tune-up: I know I need one, but I have no idea what it involves. To that end, let’s take a very high-level look at what precisely a financial plan involves.

To my mind, a financial plan is composed of four equally important components: data collection, needs and goals discussion, calculation, and analysis. Ironically, while the calculation (e.g., how much I need to have saved to retire on my 65th birthday) is the part most people associate with the plan, it’s the easiest part of my job.

Data Collection (DO NOT SKIP THIS PART)

Are you still with me? Good. I know you wanted to skip past this bit. Everybody wants to skip past this bit. It even sounds boring. It is also the most important (and often useful) part of the process. Some of it is just as dry as you would assume. What is your home worth? How much to you earn? What are the details of your debts? And while I’m sure you can see why this information is essential, gathering the data is about as exciting as a day trip to the Unsalted Cracker Factory. But then we get to the more exciting stuff, like: how much do you spend? Sounds easy, but be honest, can you actually tell me how much you spend every month? I’ve seen people misestimate their spending by tens of thousands of dollars a year. And that is not from multi-millionaires. Going through the process of looking at and accounting for your spending can be incredibly enlightening. Have you thought about how much of your children’s educations you want to finance? Do you want to pay their way through school to focus on their studies, or do you prefer for them to have some skin in the game? For some of my clients, answering these questions ends up being the most valuable part of their plan, and these are just a couple of examples.

My personal favourite part of the planning process is the needs and goals discussion when I get the opportunity to understand what is important to you and help you frame your desires in a way that we can use. This is when everyone gets to live out their One True Fantasy – talking to someone who wants you to talk about yourself. Here we might cover topics as broad as what retirement looks like to you; your estate goals for your children/family; what keeps you up at night; what is the exit strategy for your business; and many more. The directions this conversation can go are almost limitless, but the goals are always the same, one: for me to understand you better to make sure the plan addresses your needs; and two: for you to determine and articulate your needs and goals.

Calculations

Surprisingly, this is the easy part. Financial planners use fancy software that takes care of the projections and calculations for us (assuming we have gathered good data in the first place). That said, I will
mention a few things planning software accounts for:

• Inflation, including earnings, expenses, and indexing of tax brackets
• Government pensions, including CPP, OAS, and OAS claw back
• Taxes. High-end planning software will estimate taxes on a year-by-year basis, allowing for analysis of the impact of certain tax strategies (i.e., early RRSP withdrawal)
• Investment returns
• One-off expenses or changes in spending during retirement
• Insurance needs

Analysis

This is the part where we answer all of your questions (and several you didn’t know you had). As appropriate, we can look at issues such as: should you withdraw from your RRSP before age 71; are you exposed to US estate tax; does your structure match your estate goals; are there income-splitting possibilities between spouses; are there better ways to leverage your corporation, etc. This is really the spot where we apply our knowledge and experience to your specific situation.

The amount of analysis incorporated in a plan can vary greatly depending on the complexity and situation. The goal is always to make sure that you have the relevant information you need to make critical financial decisions.

The More Things Change…

The final thing to understand about financial plans is that they are living documents, subject to change. They are not a one-time, etched in stone, for your entire future. They are a starting point to begin making proper financial decisions. Best practice would see a plan updated every three to five years or when there is a material change, including a change in goals and objectives. The plan you start with will not be the plan you retire with, but it will be a great stepping-stone along the way.