One area of financial planning that we often encounter is balancing clients’ plans for their children with their hopes for retirement. This can be difficult and we must consider a large number of factors when deciding how best to allocate our clients’ resources.
Know What You’re Planning For
First we must understand what our clients’ plans actually are. Many parents’ plans won’t be much more detailed than simply hoping to help their children with the cost of university, getting them on the housing ladder, and having a comfortable retirement in their old age. However, it’s usually possible to establish what the key dates are likely to be and how much each objective might cost. At this stage we really don’t need to be too precise as any estimates are always going to be off target but it is always useful to have a structure to work to. Life will also throw up roadblocks and detours along the way but having a framework is still crucial if we’re to know whether we’re on the right track.
Reality Check
It’s also important to understand what’s behind each of these priorities and which trade-offs might be acceptable if difficult choices need to be made. For example, is it crucial that you cover all the costs associated with university in full or is it more important that you simply make an affordable contribution that makes your kids’ lives a bit easier during higher education? And is retirement likely to happen at a specific age or might it be a gradual transition over a number of years?
Retirement is often such a distant concept that it’s easy to prioritise your children’s education without too much thought to the longer-term impact. This is why we really also need to understand what the reality of the situation is and whether our clients’ goals are feasible in their current form. While we can’t be sure what the future holds, by providing a realistic projection we are able to empower our clients to make informed decisions about their future.
This can provide the opportunity to look more closely at what clients are spending their money on and whether this aligns with what they say is most important to them. Reviewing spending patterns and identifying areas where costs can be cut can lead to increased savings and a greater potential to reach their goals for both themselves and their children.
Keep Your Options Open
Once we’ve identified what resources are available we can start to look at how they can be allocated between different priorities.
Although it’s great to have specific goals and plans to reach them, it’s worth remembering that even the most meticulously planned journey can veer off track as ‘life happens’ along the way. It’s therefore key that any plan is adaptable and will serve you in the future no matter what life throws at you. We must accept the uncertainty of life and plan accordingly.
In practice, this might can mean any of the following events (as well as others):
- Kids don’t pass the entry exams for private school
- Local schools improve to a level you’re happy with
- Kids don’t go to university
- Kids continue to rent rather than buy a home
- Redundancy makes saving difficult
- Kids move abroad when they are older
- Health problems require early retirement
- Illness, disability, or death make saving difficult
We’ve seen numerous well laid plans rocked by events like these and because circumstances can change so easily, it’s important to bear in mind access restrictions and penalties that affect pensions, Junior ISAs, and Lifetime ISAs. It’s also crucial to have funds to fall back on in an emergency and the right insurance in place to cover all eventualities.
Above anything else, the most important step is simply to start saving steadily towards your goals. You can always increase you savings later on or change the proportions earmarked for each objective but until you start saving your goals won’t get any closer. It’s then a case of monitoring your progress and making the appropriate adjustments along the way.
Things To Consider
Once you’ve clarified goals, established affordability, and allocated resources between objectives, there’s still a lot left to think about. You’ll have to choose investment wrappers and consider tax efficiency. Then there’s the underlying investment funds to choose.
You must make sure these funds are appropriate for the investment timeline. Consider not just the ups and downs of the stock market but the eroding effect of inflation over the medium to long-term.
And as with any financial plan, it’s also important to have the basics in place, including:
- An emergency fund of between 6 and 12 months’ worth of expenditure
- Sufficient insurance in place in case of death, illness or disability
- Contributing the required amount into your workplace pension each year to obtain the maximum contribution from your employer
Richard Fyfe is a Chartered Financial Planner and a Director of Fyfe Financial.