Many advisors do a financial plan with one option. It’s the one they believe is likely to happen. Unfortunately what we believe is going to happen often doesn’t and the plans we assemble are inaccurate.
I think it makes more sense to think about the financial planning process as one where we build several scenarios that could happen and stress test each scenario to see if the plan gets you to your financial goals. None of us know what’s going to happen in the future. Using scenario planning allows you to think about what could happen instead of trying to predict the future.
Financial plans are more about direction than anything else. None of us know what the future will bring. When you develop a financial plan that shows a sense of accuracy it’s for you to believe you have the answer when one doesn’t exist. When you develop several scenarios of things that could happen you might think about the future and ask yourself key questions about things that could happen.
If the market drops significantly for two years right at retirement, what will that do to your plan? If you lose your job and have to live on savings for two years before getting another good job what will that do? If you get seriously ill and need to find a way to not only provide for living costs but also high medical bills what does that do?
We need to ask you, “what nightmare scenarios keep you up at night?” These are the issues we need to stress test and see what happens in your financial life. Our job as planners is to help you see that what we hope will happen in life doesn’t always happen. You should think about the difficult things that could happen and prepare for some of the things you might need to do that are uncomfortable.
Planning should start with a probable scenario to see if you can expect financial success with your plan. If you’re successful then testing for disasters might make sense. If you’re not successful you need to start testing alternate scenarios to see what changes you’re willing to make.
Our job as planners is to help you see what direction your financial life is moving in. We can’t give definitive answers for what’s going to happen in the future. We can talk about direction and you understand whether you appear to moving in one that will help you reach your financial goals.
When we start with the assumption that they will test various scenarios we stop thinking about the answer and start wondering which scenario is most likely. It’s thinking about different things that could happen with you that adds value to the financial planning discussion.
Scenario planning by its nature is thinking about what could happen in general terms. I believe financial plans that are done with the goal of showing direction instead of trying to be 100% accurate are more valuable for you. After all, planning is about what we think might happen not what is going to happen.
We have a resource center for personal planning that has a variety of reports and questionnaires that you can use to see what direction your plans are going. If you’re interested in seeing what reports we have, click on the button below and you’ll be taken to our personal planning resource center.