Planning your finances is simple. You work out what you want to do with your life, you formulate a plan to achieve that and you install vehicles/mechanisms to deliver the plan. And, as long as you stick to the plan, life should be rosy.
But unfortunately, it’s rarely that easy. As we all know, life has a habit of throwing curve balls every now and again and these can derail the best-laid intentions. So, how do we make sure these ‘little surprises’ don’t tum out to be catastrophic? I would suggest you need to be fully aware of your circumstances and this needs to be realistic.
What if you can’t work?
Arguably, the greatest asset available to any individual is their ability to work and earn a wage. Access to a regular income is the foundation of most people’s financial planning. It drives your lifestyle, provides security for you and your family and creates the freedom to define your future.
But that asset, being reliant on your health and wellbeing, is fragile. What if you are unable to work? What if, out of the blue, you fail a medical and lose your licence to fly? There will still be bills to pay, possibly mouths to feed and potentially other commitments you will be unable to avoid. Your employer may continue to pay you for an extended period of absence, but what happens at the end of that term?
Similarly, death. If you are the breadwinner or a major contributor to the household budget, how will your family cope if you died and your income to the family unit was lost? Again, your employer may offer some cover, but is this enough? Will this be sufficient to enable your loved ones to cover their liabilities and maintain their standard of living?
And, if you have one, let’s not forget about your spouse or partner. What if they become seriously ill or die? In theory, there may be nothing stopping you continuing to work, but what changes will you need to implement to maintain your home life, especially if you have children? Will you need to reduce your working hours? Will you need to take time off? Will you need to employ a nanny or arrange other childcare?
Insure, insure, insure
In most cases, the impact can be softened by maintaining sufficient insurance. Income protection, life assurance and loss of licence cover all have their place, although their relevance will depend on your personal circumstances.
The UK population is hugely underinsured and the reason for this, I would argue, is a general lack of awareness and the misconception that ‘it won’t happen to me’. Unfortunately, it will happen to someone.
Accepted, the cost of implementing suitable cover hopefully proves a complete waste of money, as I don’t wish a claim on anyone, but cover can be worth its weight in gold should a claim ever be necessary.
Obviously, you can never compensate for the emotional loss, but what says ‘I love you’ more than making suitable provision to ensure your family are left with no financial worries in the event of your untimely demise?
Contingency planning doesn’t stop with serious sickness and death, though. I was contacted by a retired BMI pilot who saw his pension enter the Pension Protection Fund (PPF) a few years back. Initially fearing his pension entitlement would be decimated as a result of BMI’s collapse, he took some comfort in the fact that he had amassed significant savings throughout his career and these would act as a ‘safety net’ to fall back on, if required.
Although the old adage ‘don’t put all your eggs in one basket’ comes to mind, the key takeaway is the fact this man had gone out of his way to build a contingency fund to soften the blow of any unexpected hiccups, whatever they may be.
Peace of mind
The benefits of taking such action are far deeper than simply accumulating a pot of money. It can offer peace of mind and preserve dignity in times of adversity. These are human comforts that go far beyond the accumulation of wealth per se. They touch on the very core of why we seek to obtain money in the first place – security and freedom.
In formulating plans for our clients, we always have a starting position of if this goes wrong, where does it leave the client? If the answer is financial hardship or ruin, then we know the plan is deficient and we need to set about ensuring that outcome never happens. Regardless of how unlikely an event may seem, I would suggest you would be wise to adopt the same position.
One area I am deeply concerned about currently is pension drawdown – the ability to draw an income from your pension fund, which remains invested, without the need to give your capital away to a pension company in exchange for an old-fashioned annuity.
There are only two possible outcomes – your pension fund outlives you or you outlive your pension fund. Without any contingency arrangements, the latter is highly undesirable. Yet, many people enter drawdown with no real idea of the risks or any consideration of the consequences should things go wrong.
Indeed, I have had conversations with many who frankly refuse to face reality on the false pretence that they believe they are somehow immune from a poor outcome. Of late, this has been heightened by the great advance in investment markets and the sense that this is now the ‘norm’.
Although not necessarily removing the risk altogether, the securing of a guaranteed income (for some of your requirements in retirement at least), cash buffers and withdrawal strategies can all help you ensure you avoid a future calamity.
A good financial planner will assist greatly in this regard. Financial advice may come at a price but, in certain circumstances, the cost of not getting advice may well prove much higher.