By the end of this article, you’ll have a method to test your financial plan – even your entire wealth management strategy – against known economic patterns, or any economic scenario you can dream up. In doing so, you’ll have a comprehensive forecast of your wealth, in endless ‘what if’ scenarios.
What ‘what if’ are we talking about?
- What if the share market takes a dive?
- What if we need to sell property in a hurry?
- What if my property won’t sell?
- What if we can’t fill our rental properties?
- What if we or someone we know needs extensive financial support?
- What if I lose my job?
- What if my business fails?
- What if my superannuation collapses?
- What if I draw too much on my portfolio?
- What if interest rates return to 20% or more?
- What if I need to retire early?
- What if the pension disappears?
- What if property prices decline?
Why are these questions important?
Why can’t we deal with them when or if they arise? The short answer is – you could, and many people do. But in doing so, you’re risking everything you’ve worked so hard to achieve. Locate any weakness now you’ll know if your plan is robust enough to navigate any roadblocks, and how much (in financial terms) it will cost you.
Say, for example, the share market takes a dive and you don’t want to sell shares. You try to sell a property – but that doesn’t work either, and renting isn’t viable. How long can you maintain your other repayments and commitments? Cashing out investments now means taking a big loss in capital and fees, only to have to purchase again once the market has recovered. The difference in real terms over a lifetime could swell over hundreds of thousands of dollars.
Analysing this sort of risk is called sequencing – when the order and timing of your investments is unfavorable – and is often looked at in terms of the impact on wealth for retirement. In fact, sequencing risk is at its peak as you enter retirement, because your nest egg is built and any sudden drop could easily destroy your retirement plans.
Evaluate risk by creating a financial model
A financial model of all of your current investments, property, cash, superannuation, and annuities – essentially your entire wealth position – is like a map of the future. You could map out from now until retirement, or the 30 years following retirement.
With a financial model, you can:
- See the quality of life you expect in retirement by estimating your desired drawdown amount.
- Plan for the unexpected by testing extreme conditions such as dramatic interest rates rises or reduced incomes.
- Find and resolve weaknesses that leave cash flow less than expenses.
Financial Mappers is software that lets you create a financial model in moments. Everything from capital growth, retirement income, cash balances, and so much more, are recalculated instantly on the fly so you can see and simulate any scenario effortlessly, all without going near a spreadsheet!
Test your financial plan using past economic data or custom scenarios
‘Modulators’ are a feature on Financial Mappers that make testing your plan as easy as pushing a few buttons.
Using real data from 10-year cycles with economic busts and market crashes, you can analyze your portfolio in easy-to-read graphs, tables, or reports. A great way to stress-test your portfolio and identify any weaknesses.
You’ll have full control to customise the interest rates and a host of other settings to answer those ‘what if’ questions that would otherwise keep you up at night.
Also using Financial Mappers, you can:
- Find new ways to reduce your investment risk as you approach retirement… and reduce your stress and worry during these years.
- See the effect of diversifying into a savings portfolio… to enjoy the safety that cash accounts can provide.
- Learn about reducing risk with annuities… without the need for complex financial calculations.
- See the effect of putting more money into superannuation earlier on in life… to reap the rewards of more money in retirement.
- Determine the optimum liquid assets you need…. and avoid cashing out investments which improves your net wealth.
Start creating your financial model today, using Financial Mappers. It’s an unbeatable tool and incredibly useful for any investor or financial planner looking for a simpler way to understand their wealth.
Financial Planning Software – Make a Financial Plan now
Glenis Phillips SF FIN – Designer of Financial Mappers