Financial Planning and Retirement - Who Needs Financial Planning?

When it comes to financial planning, there are many reasons people often give for not making a financial plan. They can range from "I don't have any money" type objections to "I don't have any time right now" excuses. But, in today's turbulent financial world, you must be very careful. Many Middle-Class Americans are one month away from living on the street. The perceived security and safety of a job is illusory (just ask any unemployed American).

Why Do You Need Financial Planning?

In short: life requires self-generated, goal oriented action - a plan. This extends to every area of our lives, including financial. The degree of our planning will determine - at least in part - the degree to which we are successful. And, although a financial plan does not guarantee success, it is necessary for it (at least in the long-term).

Those who scoff at this need to realize that life is motion. It will not stop or slow down for you. If you do not consciously make a financial plan, you will make one for yourself perhaps subconsciously, and randomly, and usually to your own detriment.

Consider the case of "John", who sees no need to meet with a professional financial advisor or learn anything about financial planning. He believes himself to be "small potatoes", or he perceives financial planning as "unnecessary" or "boring" and thus he avoids it - at least for a while. However, what John does not realize (or was not paying attention to) is the fact of reality that life demands that we make decisions every day in a variety of different ways and in different areas of our life.

Money happens to be one of those areas that we are forced to deal with almost constantly, and usually multiple times throughout the day. How do we make the decision to grab a cup of coffee from the local donut shop in the morning vs. putting that money back into our pocket and simply make it at home instead? For John, this decision making is done pragmatically, and emotionally. Whenever he feels like buying a cup of coffee from the local donut shop, he will. If anyone asks him why he spends so much on coffee every day, he rationalizes it: "$1 isn't that much." he tells himself (and anyone that dares to ask).

But John's statement is void of any context. Consider, if we were to put that $1 spent on coffee into an investment yielding 8%, that $1 would become $1,500. Strategically placed at 20%, it balloons to well over $20,000 after 30 years. Would you consider $20,000 to be "not that much money"?

But to be completely honest, this isn't about whether John should or should not buy that cup of coffee, it's about his reason for doing so. His disastrous "reasoning", which attempts to replace a truly objective approach to his financial life, can very easily spill over into other areas of his life. The coffee issue is "small potatoes". The line of "reasoning" is not.

Coffee is not John's problem. What if we were to take a look at another common dilemma in John's life (as well as many other American's lives)? Suppose the decision is whether John and his wife should pay off their mortgage as quickly as they can so that they can be rid of that "evil" mortgage payment and all of the interest that they are paying. As a result of his upbringing, or some in vogue article his wife read in a magazine, or just on a mere whim, John arbitrarily decides that paying off the mortgage quickly is a good thing. He and his wife have a 15 year mortgage, and are making payments on it as quickly as they can. They don't realize that they are losing many hundreds of thousands of dollars by financing a home this way. John is confronted by either a friend or a financial planner who tries to show him how would be better off if he just held onto that mortgage and invested the difference.

Now, John and his wife can rationalize their actions (being afraid to admit to having made a mistake at all) by saying "yeah, well...we just like the idea of having our home paid for". Yet, if pressed for a more thorough answer, they don't have one. When the facts of reality confront them that dumping their 15 year mortgage and carrying a big long mortgage instead (even well into retirement) and investing the difference is much better for them financially, they squirm and cringe and retreat into a mental fog. They no longer have any idea why they like the idea of having their home paid off.

John had decided long ago that he didn't need financial planning. That he had a handle on everything. Now perhaps John, like many other Americans do, continues to ignore or simply continues to dismiss the idea that financial planning is like any other subject - it needs to be learned. What are the consequences of not taking responsibility and the initiative to meet with a financial advisor (one that can teach them how to prepare for financial uncertainty as well as teach them sound financial planning strategies)? Well, in John's case, he eventually retires and without a mortgage. He has lots of equity in the home, but virtually no savings. His home has appreciated and depreciated with the real estate market, but even if he wanted or needed to cash out the money, he would have to take out a loan and pay it back (or sell the house). John and his wife were able to scrape together something that resembles a savings, but because they didn't pay much attention to the real effects of inflation, their nest egg is substantially smaller than what they had hoped for.

In addition to all of this, it's looking like John's wife's health is deteriorating, and she may need long-term care (statistics from major life insurance companies - like Met Life - suggest that 1 out of 2 people - 50% - will need long-term care at some point in their lives). Or expensive medication. Where do they get the money to pay for these things? Perhaps they go without. Perhaps they die prematurely because of it, taking to the grave the erroneous idea that financial planning never could have helped them. Never could have saved them. Never could have helped them live a better life. Yet the truth is the opposite. It could have helped them, and it could help you too.

Financial Planning As Practical

Many people don't think in terms of financial planning as being "practical", yet this key mistake is what keeps many individuals from becoming financially successful. Unless we make it a point to study it in school, our only formal education in finance and economics is perhaps from the worst of all teachers - the Government.

Governments do not induce better money management habits. The concept of deficit spending and the growing national debt that is a result are prime examples of why. They aren't very good at teaching individuals the value of investing either, and the ill-fated Social Security program is a good demonstration of what happens when Government allegedly invests our money for us.

Banks and certain other financial institutions regularly fail during recessions despite the fact that they are heavily regulated by the Government. In fact, at least for the banking industry, it is the Government that promotes such reckless lending and investing policies that lead to such failures. By forcing everyone to comply by the same irrational rules, chaos is inevitable.

The fact that these institutions are supposed to represent the hallmark of good money managers, it should be no surprise that many individuals are completely lost when it comes to personal financial planning. The folks who are supposed to be the experts can't even do it themselves.

The only individual that can help them is the financial advisor. By the very nature of the profession, financial advisors promote thrift, savings, and sound, rational investments and speculations. These are the essential concepts that are necessary for an economy to grow and thrive. If a nation is conserving it's finances instead of consuming them, it has a much better opportunity for growth.

For the individual, the financial advisor promotes personal growth - personal financial growth. And, without growth the only thing open to us is death.