Don’t Underestimate the Importance of a Written Financial Plan

The following undocumented/unverified story shows the importance of having a written financial plan. It provides important lessons about preparing financially for each stage of your life.

Many years ago, the graduating MBA class at Yale University was asked how many of them had a plan for their business future.  Of course, 100% of the class said they had a plan.  However, further questioning showed that only 3% of this class had their plan in writing, the other 97% only had their plan in their mind.

Ten years later, the surviving members of this class were asked a series of questions, and the answers given showed a remarkable outcome.

The 3% who had their business plan in writing ten years earlier, now had a combined net worth greater than the remaining 97%.

The conclusion is obvious.

As President Dwight D. Eisenhower said, “Plans are nothing; planning is everything.”

It is one thing to have a plan in your mind and an entirely different thing to have your plan in writing. So, how do you develop a written personal financial plan?

One way is to go online and choose from several software programs. These essentially “write” your plan for you. However, we have all heard the term – garbage in, garbage out. If you value quality, this approach might not be for you. After all, most of these plans are overly simplistic and rely on a few very basic questions. Therefore, you can expect the plan results to be the same, very simplistic. This means the results may not be as accurate as you deserve.

When your financial future is at stake, I’m not sure you should rely on a simplistic approach. You should want the plan to be as robust as possible.

How do you start?

If you want the plan results to be as accurate as possible, work with a professional who is trained and experienced in this area, such as a CERTIFIED FINANCIAL PLANNERTM (CFP). A CFP is trained to ask probing questions about your current financial status, future goals, available sources of income, current and future income needs, risk tolerance, etc. The CFP professional is trained to help with the complex challenges that come with planning for the future.

The CFP professional will show you what it takes to maximize your retirement savings, establish appropriate cash reserves, allocate your investment portfolio, and protect your goals at each stage of your life. Unlike the software program, they have made the effort to complete a rigorous academic curriculum from either the College for Financial Planning or one of many accredited universities across the country. In addition, to maintain their certification, they must complete 40 hours of continuing education every two years.  In other words, they are always sharpening their knife.

Part of the continuing education is on ethics. Importantly, the CFP professional is also held to the fiduciary rule.

I like to explain the financial plan, which can be very complicated, in a simple way: the 30,000-foot view.

On one side of the ledger, we have your resources.  For example, income from a pension or social security, your investment assets and income from that source, a future inheritance. On the other side of the ledger, we have your needs. For example, how much do you need to live on. I cannot overstate the need to make this calculation as accurate as possible. We then assume that you will live until your early 90s, that there will be inflation between now and then, and that we will have good markets, bad markets, and all the markets in between.

The goal of the plan is to make sure that you will still have money in the bank when you pass away. One thousand calculations are made, and we want at least 850 of the results to be positive.  In other words, we want the “probability of success” to be at least 85%. If the “probability of success” is below 85%, there may be several recommendations: spend less; save more between now and retirement; retire later; downsize. The recommendations are endless, but should reflect your current state and future goals.

The beauty of a written financial plan (reference my Yale University example) is that you can perform “what if” scenarios. How do the plan results change if I spend less, retire later, save more, etc.? You can see the results change in front of your very eyes.

Hopefully the financial plan will show you that can retire earlier, spend more or take less risk with your investments.   Most retirees want to maintain their standard of living through retirement. Regardless, the sooner you start working on your own personal financial plan, the more informed you will be and the better you will hopefully feel. After all, it is far better to find out at age 55 that you need to work until age 70 than to retire at age 65 and find out you are running out of money at age 80.

If the “probability of success” results are too low, it is important for the CFP professional to communicate clearly and accurately to the clients about the problems and risks, and how to deal with them.

Alden Witman, a CFP who heads the Financial Planning division for The Harvest Group Wealth Management in Waltham, MA, has a few important tips for maximizing your financial plan.

“Keep an accurate budget. Write down your total monthly expenses for a few months to determine a realistic spending need. Factor in recurring expenses that you will likely need in the future. Example – a new car every 7 years, etc. Classify your financial goals as “wants” or “needs.” If the plan results are not favorable, what sacrifices can be made? Start scaling back on your “wants” first. Maybe this is planning for $5,000 per year for vacations instead of $10,000 per year.”

Alden adds:

“If the clients plan results are initially poor, we can help the client understand what needs to be done to get them into “the confidence zone.” There are a few variables – reduce spending, increase savings, higher level of risk based on the return assumption. Some people simply are unwilling to reduce their level of spending. If this is the case, what can they do to meet their financial or lifestyle goals? We can help them determine how much additional savings they would need or what increased rate of return would be necessary to achieve their goals.”

There are many moving parts when it comes to the financial plan. What if one spouse passes away early? What if someone becomes disabled? What if there is a long-term care event? What are the estate planning needs? We analyze these insurance needs after looking at each family’s individual situation. Maybe they have enough saved to self-insure. Maybe once spouse has a pension without survivor benefits and there may be an income replacement need. Maybe there is a large mortgage that would need to be paid off in the event of one of the spouse’s deaths. These are all important factors that must be analyzed and evaluated.

To summarize, there are at least seven reasons to have a written financial plan. They include:

  • Planning your future income
  • Ensuring cash flow in retirement
  • Determining savings
  • Planning for your retirement lifestyle
  • Determining how much risk you need to take
  • Understanding which assets will be an income source in retirement
  • Ensuring security and peace of mind for your family

As the father of time management Benjamin Franklin reminds us, “Failing to plan is planning to fail.”

The Harvest Group provides retirement planning as part of our Harvest Wealth Management for Life program. To speak with one our advisors, feel free to contact us today to book an appointment.

Important Disclosure:

The Harvest Group Wealth Management, LLC is an SEC registered investment adviser principally located in Waltham, MA.  Information regarding our firm’s services can be found at A copy of our current written disclosure brochure discussing our advisory services and fees remains available upon request.


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