I know there are great financial planners out there who make and sell one-time financial plans, but I still hate them. They aren’t necessarily wrong. Many young savers simply need the encouragement to form good savings habits, and they can go on their way.
However, for the saver who is nearing retirement or facing transitions, I hate the idea of creating a financial plan and saying, “Bye! You’re good to go!”
That advice could not be further from the truth. Here are 3 reasons why:
1. One-time financial plans can give a false sense of security
You sit in a financial planner’s office. You tell them all of your financial goals, explain the lifestyle you want, show them your statements, and done! The advisor shows you a nice projection of your assets. Woohoo! You’re increasing your wealth forever.
But what if you have to retire early because of family circumstances (lower Social Security benefits)? What if you decide to move out West to be with your grandchildren (higher state taxes)? What if your company cuts the cost-of-living adjustment on your pension (inflation adds up)?
Life will throw you dozens of changes. You might not realize the huge financial impact of some of these changes. However, if you’re meeting regularly with your financial advisor and you update her on things happening in your life, she will understand the impact of those changes and revisit your plan with you. It’s important to update your plan as inevitable life changes occur.
2. One-time financial plans do not prepare you for the stock market’s volatility
Ladies and gentlemen, I don’t mean to frighten you when I say this, but no one can predict the stock market. We know from history that returns are positive every 3 out of 4 years. We DO NOT know the order of those returns.
When you get a one-time financial plan, an advisor will usually say they are projecting that you earn X% every year in the stock market. “We all know it won’t be the same percent every year, but it will be a good indicator.”
But… it’s really not!
In our firm, we run a Monte Carlo Analysis. This runs clients’ projections through 1000 different test trials where they experience variable returns – like real life. We’ll grab one of those trials. Sometimes, there will be a lot of good years of return in a row at the beginning of retirement. Those trials look great! Sometimes a long stretch of positive returns doesn’t happen until the end of the plan… those trials usually aren’t great. I’ve truly seen clients with differences of MILLIONS OF DOLLARS between trials.
Here’s what’s important to remember, no one knows what your real life “trial” will actually be! Stocks are a great investment, but they are volatile. You should be walking alongside a financial advisor, so when/if a “negative trial” does become your reality, they can help you make decisions to maximize your retirement instead of leaving you thinking that all is still well (when it may not be).
3. One-time financial plans leave you susceptible to big mistakes
I’m going to digress for a moment. My general doctor recently retired, and I put off finding a new one. I was having horrible problems with my allergies but *whoops* I no longer have a doctor to visit. I called a new office only to be told there was a 3 month wait for new patients. However, if I were an established patient, I could have been seen right away.
It’s the same with financial planning. You need someone to call when you have an important financial question or concern, and you need objective advice.
If you get a one-time financial plan, you take your plan and leave the financial planner’s office with no long-term relationship. No promise from them to call and check on you during market volatility. No agreement in place that will allow them to talk you off the cliff when a bear market hits and you want to make the big mistake.
And what is that big mistake? Being frightened and selling your stocks at a low because you want to “stop the bleeding.” Here are 6 other mistakes a financial planner might keep you from making.
Again, I don’t mean to burn other planners out there who do one-time financial plans. They are certainly better than nothing! I am just fearful they give people a false sense of security. Financial planning is a long-term process that involves a relationship, investigating, behavioral changes, and objectivity.