Financial Planning Dispelling the Myths and Misconceptions


Contrary to popular perception, planning for your financial future is not an impossible task, not for anyone. But there are persistent myths that first need to be dispelled. If you have no real financial plans for your future are you really ‘planning to fail’?

When I meet someone who needs to give commitment and hard work toward making a solid financial future for themself, there are usually two responses they give to the idea they should be taking some action and that now is the right time to start. The first is that they will never retire. The second is that they are glad this has been raised and they need help to start on the right path.

To the first response I always realise that the person has their head in the sand and that they are actually hiding from the stark reality that they are way behind in their planning. I hear all sorts of excuses which people ultimately justify to themselves about this.

The second is much easier to deal with; this person recognises the need and the urgency and is always keen to implement a strategy and structure plans that will help them reach calculated targets. The person for whom we start planning will almost always feel better about themselves about making a start on the road to financial security.

If you have read thus far you are likely a number two. But no matter where you stand there are some myths which are often misunderstood and other misconceptions which may be leading you astray.

My property is my financial future

This really is a myth because property is not everything. Many people have made great returns on property but the capital appreciation can only be realised once you actually sell a property. Feeling you have made sufficient gains to create enough wealth to retire on is often incorrect because inflation takes over, depreciating any gain you have realised when you cashed out.

Property also has a mysterious way of not selling at the value you feel it should and sometimes not selling at the exact time you want it to. Its inflexibility means you are unable to draw down a part of the capital value of any single property without entering debt.

For those relying on rental income, property is a good idea as one of the asset classes you can use. Rental rate escalation gives some protection against inflation. However, do not rely entirely on this single asset class because then you have all your eggs in one basket and if the rental market declines or even collapses you will be in trouble. Not only will it be difficult to generate the revenue you need from rentals but you may also not be able to sell a property to realise capital.

My employer pension will be adequate

Unfortunately this is rarely true. If you have had the same job and moved up the career ladder with the same employer, the chances are that you will be in a stronger position when it comes to your pension being adequate to fund your financial future. However, pensions are generally designed to generate half your earnings rate just before retirement if you have been in a scheme for forty years. A number of schemes will aggregate toward a secure financial future but will usually be insufficient.

When I profile clients I usually find that the amount they feel they need to retire on have no relation to the amount they have been earning in their job. We must also assume that the company scheme you belong to will not collapse or have to reduce benefits payable to retirees.

Contributions paid into a corporate scheme are often accumulated into your personal retirement fund. Sometimes, through the poor investment decisions of others, schemes have not created good returns and the amount which you are left with at retirement is totally inadequate.

Investing is too risky

This is often a cop out for people who know they need to do something about accumulating investments but actually feel insecure about it. Corporate pension schemes invest in markets and equities typically form a substantial part of those investments. So, as an individual, you may be nervous about investing when in fact you are actually blindly invested in equities anyway.

If you find the right investment adviser he will be able to show you ways of investing whilst taking account of your risk appetite. You will be surprised at the options available without very much exposure to equities. Such holdings are also able to generate returns far greater than you will find in any bank and they will be exposed to much lower risks.

I have left it too late

It is never too late to start making arrangements toward your own personal financial independence. If you are driving a car when suddenly a brick wall appears and you have no chance of stopping do you not bother hitting the brakes? If you are on the way to a meeting and traffic holds you up so that you will be late do you simply not bother to turn up? In both these cases the chances are that your reactions and your instincts tell you to do your best and try to stop that car or arrive at the meeting late. It is never too late.

In the same way it is never too late to start making preparations toward your retirement and you will certainly not regret this. I have met individuals who say they have retired on too much money; it is usually the exact opposite for the majority. They were late is starting and originally thought they had no chance of “getting there” but have managed to secure a comfortable retirement for themselves because of a forward thinking plan which ultimately changed their entire lives.

Quite often people can defer their retirement and gradually slow down by working part time. They will sometimes seek help from a finance professional who shows them how to uncover possible pensions they actually thought had been lost or cancelled. In the western world there is no such thing as a cancelled pension.

Investors are frequently surprised at how savings can grow without taking unnecessary risks. These smaller aspects collectively assist them to pool together a larger picture which works.

I won’t live long anyway

This is almost as bad as “I will never retire”. Medical science is constantly improving; extending lives. Look around you and you will see the reality that people are healthier and live longer. If you plan to expire in your eighties and you happen to run out of reserves at that time you really need to plan again.

I cannot afford sufficient savings

This is also a common myth similar to those who feel it is too late. Starting small and at least accumulating assets toward ultimate financial independence is a really great idea. If you started saving say $150 per month for your new born child and increased the amount by 5% per year, growing at 6% it would be worth around $90,000 when your little one got to eighteen years old. That would be a pretty good start for anyone at that age.

Ignore all of the myths and get moving on a plan today. Seek the right help and you will be nicely surprised.