Plan for the life you want

I recently read this article of which I thought would be great reading for our Blog! (It is by Craig Torr)

“Money doesn’t create happiness. It can provide you with temporary happiness, but lasting happiness comes from what you do with your life,”

As we age, we tend to want to do things rather than to buy things. Financial planning is about living a great life and not just about making a good living.

You choose the life you want to live, and your choices affect how you live at every stage of life.

Between the ages of 25 and 34, you typically find yourself in “the lean years” – paying off a mortgage bond and married with children.

 Between 35 and 44, you are in “survival” – paying insurance and school fees, as well as your mortgage bond.

 From 44 to 54, you are in “middle age”, with your children having left home – and you now have a little surplus income.

Between 55 and 64 – “pre-retirement” – you are looking carefully at your investments. And from 65, you are in retirement, hopefully reaping the rewards of your labour and monitoring your investments.

Scenario planning is key to financial planning from the cradle to the grave. It is possible to plan for all of life’s eventualities, including the unforeseeable.

The foreseeable includes buying a house or starting a family: children will fall sick and they have to be educated, so it is imperative to have medical cover and to save for their education.

But planning for untimely death, disability or contracting a dread disease calls for more complex planning. Here you need to consider how much life cover, health insurance gap cover and income protection will be enough.

 To do this – to cover your risks and protect your assets sufficiently – you need to understand your assets. Assets fall broadly into four categories:

* Business assets. These are not just the tools of your trade, but essentially your intellectual property and the skills you use to earn an income. These assets fund your lifestyle and lifetime assets.

* Lifestyle assets. These include your home, motor vehicle, holidays and “toys” (such as your bicycle or camera equipment).

* Lifetime assets. These are your investments – including shares, retirement funds, unit trusts or an investment property. These assets generate an income for you and are used to fund your retirement.* Surplus assets. These are assets that you do not need to maintain your lifestyle – what you may have inherited or plan to bequeath to charity.

Planning for both untimely death and eventual death is a critical aspect of your financial plan. This is all the more important if you are married and the family is reliant on both your income and your spouse’s.

Traditionally, financial planners would assess your risk – by establishing your tolerance for risk through a risk profile questionnaire – and then select asset classes accordingly. Your investments in these asset classes would generate returns that “box you in” by determining your future lifestyle.

A new and better planning approach is to start with the post-retirement lifestyle that you want to live.

Your chosen lifestyle will determine the investment returns that you need to achieve. The returns you need to achieve will drive the asset allocation that is required, Torr says. And your asset allocation will determine your risk profile. Some trade-off may then be required if the level of risk required is not one you can tolerate.

If you are unhappy with your retirement plan, you have only four choices. You can:

* Delay retirement;

* Save more before retirement;

* Spend less in retirement; and

* Take more investment risk.

Most retirees run out of money because they:

* Do not have a game plan. Borrowing from the popular children’s story Alice in Wonderland, of when Alice comes to a fork in the road and asks the Cheshire cat which road she should take. “Where do you want to go?” asks the cat. “I don’t know,” answers Alice. “Then it doesn’t matter,” the cat says.

* Make bad financial decisions. Retirees who try to time the market will come unstuck. Many investors adopt a herd mentality, going into markets at or near the top of an investment cycle and bailing out when share prices are low. In other words, they buy at high prices and sell when prices are low.

* Underestimate how long they will live. In 1800, the life expectancy was 38; in 1900, it was 53; but in 2012, if you have lived to 65, you have a 25-percent chance of living to the age of 97.

* Retire too early. Some of the most successful people achieved their goals after retirement age, he says. Harland Sanders – better known as Colonel Sanders, the founder of Kentucky Fried Chicken – and John Glenn, the oldest astronaut, are but two examples.

* Over-spend. People who over-spend struggle to delay gratification.

A CHANGE OF MIND

As we grow older, there’s a shift in how we make decisions – and not just those relating to money.

“As we age, our decisions are governed less by the left brain and more by the right brain. The left brain is where computation, logic and analysis takes place; the right brain is where creativity, imagination and intuition is processed.”

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