Scenario Analysis: The Key to a Robust Financial Plan
Most of the time, clients come to me unsure of how much to set aside for the various aspects of wealth protection and management. For example, they have no clue how much insurance coverage they need to adequately protect themselves against unforeseen circumstances; they also do not know how much money they need for a comfortable retirement. I often start with a scenario planning strategy.
Step 1: Classify various financial planning needs – from Wealth Protection to Wealth Creation, Retirement and Legacy Planning – according to three scenarios:
Scenario | Areas of Financial Planning |
Scenario 1: “If You Survive” |
|
Scenario 2: “If You Don’t Survive” |
Protection planning against:
|
Scenario 3: “If You Survive But are Unwell” |
Protection planning against:
|
With this, clients will be guided with a clearer direction on the areas of financial planning they need to prioritise. This makes it easier to discuss how much to set aside for the various scenarios.
Step 2: Look at Possible Solutions
I recommend a series of solutions with varying budgets and commitment levels after understanding their needs and concerns. Generally, I propose insurance policies for wealth protection. For wealth creation and retirement, I recommend investment solutions, insurance solutions or a combination of both. I categorise the solutions according to: Ideal Scenario, Average Scenario and Basic Scenario. Then, I draw up projected plans with a scenario that would meet a client’s desired lifestyle, while giving them an option that would at least cover their basic needs; there is also an option for something in between.
Example 1: Retirement planning
Here’s a breakdown of three scenarios I would present to a client whose ideal monthly income after retirement is $5,000:
Scenario | Projected Aims |
Ideal Scenario Planning | $5,000 monthly living expenses |
Average Scenario Planning | 75% X $5,000 = $3,750 monthly living expenses |
Basic Scenario Planning | 50% X $5,000 = $2,500 monthly living expenses |
* The table above is for illustration purposes only.
Example 2: Protection against Death, Total Permanent Disability or Terminal Illness coverage, I use this calculation:
(Retirement Age – Current Age) x Gross Annual Income
Let’s assume that a 35-year-old client’s target retirement age is 65, and his gross annual income is $60,000.
Scenario | Projected Aims |
Ideal Scenario Planning | (65 – 35) x $60,000 = $1,800,000 |
Average Scenario Planning | $1,800,000 X 75% = $1,350,000 |
Basic Scenario Planning | $1,800,000 X 50% = $900,000 |
* The table above is for illustration purposes only.
Example 3: Protection against Early Critical Illness (ECI), Critical Illness (CI) / Income Replacement due to illness)
Now, assume that the same client wants to get ECI / CI coverage – that is, a plan to fill the gaps of his financial health should he be struck with illness and/or be unable to work for a period of time.
Scenario | Projected Aims |
Ideal Scenario Planning | 7 years X $60,000 = $420,000 |
Average Scenario Planning | 5 years X $60,000 = $300,000 |
Basic Scenario Planning | 3 years X $60,000 = $180,000 |
* The table above is for illustration purposes only.
While planning for these “what ifs” can be daunting, doing it will help you immensely in prioritising your financial planning needs, so that you can worry less and live your best lives.
FINANCIAL SERVICES MANAGER
Raymond Tan
Raymond Tan specialises in wealth advisory – from protection planning to legacy creation. Passionate about guiding individuals and families towards gaining financial confidence, Raymond today supports over 350 clients or over 200 families from the mass to mass affluent markets. His trustworthiness, dedication and sincerity have won over many clients as well as their friends, earning him the moniker of “Referral Guru”; he gets many referrals for new clients from his satisfied customers.
This seasoned adviser, who has been with IPPFA for 14 years, has many awards to his name. Raymond has consistently qualified for IPPFA’s Producers’ Club. Additionally, he has qualified previously for the prestigious Chairman’s Round Table (CRT). He remains down-to-earth and is always happy to nurture and coach new generations of advisers, generously sharing the knowledge and experience he has gained over the years.
In his free time, fuelled by his desire to help others, Raymond stays actively involved in mission and charity work.
IPP Financial Advisers Pte Ltd
78 Shenton Way #30-01 Singapore 079120 | Tel: +65 6511 8888 | enquiry@ippfa.com |
IPP Financial Advisers Pte Ltd
78 Shenton Way #30-01 Singapore 079120
Tel: +65 6511 8888 | enquiry@ippfa.com