Sep 24, 2021

Navigating with intent: how and why financial planning works

In this blog we share how the financial planning process works and highlight six key areas an effective plan should focus on. Whether it’s planning for retirement, the purchase of a recreational property, or saving for a child’s post-secondary education, a comprehensive financial plan can help you achieve what matters the most in your life. 

You’re not imagining it. Our financial lives have become increasingly complex. With more options and modern challenges, it can be difficult to feel confident that you’re on the right path to a secure financial future.

For many, gone are the days of working for a single employer for our entire career, with an indexed defined benefit pension that will cover our needs well into our senior years. This responsibility has now shifted to the individual, who must navigate the complexities and growing challenges that arise throughout their financial lives. These challenges have been compounded by the rising cost of living and increased longevity, which have made planning for a sound retirement even more difficult.

Fortunately, a comprehensive financial plan guided by a financial planner can help you navigate these complexities with greater intention and control. Here, we’ll explore the financial planning process and show how it can help you achieve your financial goals for greater peace of mind.

 

How financial planning works

A comprehensive financial plan helps to bring all the components of your financial picture together to develop a clear strategy for achieving your life goals. This begins with a deep understanding of your goals and what truly matters most in your life. Some of these goals might include planning for retirement, the purchase of a recreational property, or saving for a child’s post-secondary education. This is followed by a detailed gathering of your financial data to determine how you are progressing towards these goals, and identifying any gaps that may exist.

An effective financial plan should focus on six key areas. Here are the categories, as well as some questions to consider for each:

Financial management

 

  • What are my income sources and where is my money going? Are there ways that I could reduce my discretionary spending?
  • Do I have an emergency fund and is it sufficient to meet my needs?
  • Am I effectively managing my debt? Are there any opportunities to consolidate or accelerate my debt repayments?
Investment planning
  • Will my investment portfolio provide sufficient returns to meet my lifestyle needs?
  • What is my overall asset allocation, and does it align with my life goals?
Insurance & risk management 
  • Is there sufficient coverage in place to look after my family in the event of my death or disability?
  • What would be the financial impact of developing a critical illness or requiring long-term care?
  • How can I use insurance to preserve my estate and build wealth for the next generation?
Tax planning
  • Am I optimizing my annual TFSA & RRSP contributions for me and my spouse?
  • Have I taken advantage of all income splitting opportunities with my spouse and children?
  • Do I have a clear understanding of my cross-border tax exposure and potential tax events that could arise in my future?
  • What would be the impact on my taxes in retirement if I decide to retire in a different province?
Retirement planning
  • Based on my current assets, and my ongoing savings, how much will I be able to spend in retirement? What would it look like if I retired 2 years earlier than planned?
  • When should I start my CPP/OAS benefits?
  • What is my optimal decumulation plan in retirement to minimize taxes? Would early withdrawals from my registered accounts be beneficial?
Estate planning & legal aspects
  • Who should I name as a beneficiary or successor holder on my registered accounts (RRSP, LIRA, TFSA, RESP, etc.)?
  • How will my assets be distributed in the event of my passing?
  • What are the tax and probate implications for my estate and are there any strategies to minimize these costs?

Depending on your current life stage, greater emphasis will be given to a combination of these areas to best meet your needs. For example, for a younger family, debt management and education planning may be given greater importance, whereas someone transitioning into retirement may want to focus on retirement planning, tax planning, and insurance planning.


Once your financial planner has a deeper understanding of your situation, they can begin their analysis using various models and frameworks. A detailed plan can then be presented with recommendations and appropriate action items for each of you. This plan will outline how the recommended strategies will be implemented, and how progress will be monitored ongoing.

What financial planning can do for you

Given the breadth of a comprehensive financial planning analysis, additional items often arise that only become apparent once your financial picture is viewed through this holistic lens. Some examples include beneficiary designations not being aligned with the estate plan, investment accounts that could be better structured for tax or estate planning purposes, or risks that had not been previously identified.

Because financial planning is an ongoing process, it forces you to reassess your needs over time and uncover new ones that should be addressed. This can help you avoid unnecessary financial loss and optimize tax strategies. Similar to your estate documents, a financial plan should be reviewed regularly and updated when there are any significant changes to your life circumstances (e.g., birth, death, marriage, or retirement). It should also be updated when there are changes to external factors such as tax legislation, estate laws, or economic conditions that could have a significant impact on your situation.

A financial plan also helps guide major decisions through a comparative or “what-if” analysis to help mitigate risk. This can help quantify the impact of your most pressing financial decisions. For example, what would be the difference between retiring at age 60 or continuing to work until age 65? Or what would be the difference between providing financial support to my children today versus leaving my assets to them through my estate?

What-if scenarios can also be used to test the plan for extenuating circumstances such as a market correction, lower-than-expected rates of return, or longevity risk. Sensitivity analysis can also be used to determine the impact of changes to a single variable. For a business owner, this might also include looking at different valuations for the sale of their business or looking at how various share prices could impact long-term incentive plans for a corporate executive.

It’s a common fallacy that having a large asset base means there’s little benefit to be derived from financial planning, as it’s often thought of as merely cashflow management. But this grossly oversimplifies the process. Given the breadth of the financial planning process, it speaks to all levels of financial complexity. For instance, those who have achieved financial independence will surely not outlive their assets, which leads to a deeper conversation about defining their legacy and the impact they wish to make on the world. Such individuals would benefit from considering strategies for philanthropic giving, gifting to the next generation, or reviewing their estate plan in greater detail.

On the other end of the spectrum, it’s never too early to begin your financial planning journey either as financial decisions made early in life will have the greatest impact when compounded over a long-time horizon. Wherever you are in your financial journey, the best time for a comprehensive financial plan is now.

Not sure if something’s missing from your financial roadmap? Reach out to us by filling out the form below and we will be happy to guide you towards making sound decisions.

 


Trevor Fennessy, BBA, CFP is a Senior Planner in T.E. Wealth’s Calgary office. Trevor’s holistic approach to financial planning integrates his clients’ financial goals and life circumstances to create wealth management solutions that provide optimal reassurance for them. He works with families, corporate executives, and business owners to help them achieve true financial wellness and peace of mind.

Trevor’s expertise spans the full realm of financial matters from tax planning and preparation, inheritance and estate planning, charitable giving and philanthropy to comprehensive retirement planning and wealth preservation.