The best way to see the power of a financial plan is to see it in action. A great example is that of Sally and John - a married couple we helped recently. They came to us unsure about what to do, with concerns about whether they were making the most of their money.
After some help from a financial coach, they now have a financial plan that will leave them £496,457 better off by the time they reach retirement, with all of their most important financial goals achieved.
We’ve changed their names and some identifying information in order to protect their privacy. Take a look below to see how we helped them.
Meet Sally and John
Like many people, Sally and John have long felt they could probably do more to make the most of their money, but it never made it to the top of their to do lists. However, after the birth of their daughter, Emma, and a recent promotion for John at work, they decided that it was finally time to get things sorted.
Here is a summary of their current situation:
Both 30 years old, with a 2 year old daughter.
Combined income of £70,000 - about average for London, where they live and work.
£20,000 in cash savings, but no investments so far.
They have £20,000 in pensions. Both Sally and John have a pension through work, but they only contribute the bare minimum. Sally puts in £50 per month (1% of her salary) and John adds £100 to his (2% of his salary).
After some discussion at home and with their financial coach, they agreed on three financial goals that were most important to them. For lots of people it’s hard to plan more than a few years ahead, but they knew that no matter what happens, they want to:
Provide a financially secure future for their daughter, Emma, and to make sure that they can afford to support her through university when she grows up.
Buy a family home in the next 3 years, near a good school. After viewing properties recently they found several houses they would be happy with for around £300,000.
Make sure they will be able to retire comfortably. We agreed that they would need a minimum retirement income of about 60% of their current salary, but ideally they would have as much as possible at the point of retirement.
Their current path
So, the next step is to work out what they’re currently on track to achieve. Supposing that Sally and John changed nothing about their finances, would they be able to achieve their goals?
Here is what their first financial plan showed:
Please note - the big drop in pension assets is due to a simplifying assumption that John and Sally purchase an annuity to provide a retirement income.
The good news for Sally and John is they are on good incomes with plenty of time to plan. According to the cashflow forecast, they will have around £943,004 by the time they retire. This sounds a decent amount but - bearing in mind the effects of inflation - unfortunately falls well short of the amount needed to provide 60% of their current salaries (in today's terms) through retirement.
With an eagle eye, you’ll also note from the forecast that they are set to be £5,000 short for the house they want within the next 4 years.
The best news is all the costs of raising Emma (including childcare and university fees) are incorporated and affordable. And just look how the chart rises once Sally and John reach 48, and Emma finishes university!
Can we do better?
Once we had an initial plan, Sally and John's financial coach spent some time looking at ways they could improve their situation.
As mentioned above, Sally and John have been contributing a bit to their pensions, but only a very small portion of their salary. However, Sally's employer will match her contributions up to 2%, and John up to 3%. By not contributing much to their pension they were missing out on 'free' money from their employers and also losing the tax benefits that come with saving through a pension.
Since retirement was a big goal for them, we changed their pension contributions to 2% (Sally) and 3% (John) of their salary which over the years adds up to a big increase in their savings for retirement.
Sally and John don't have any investments, which means they are missing out on one of the most powerful drivers of long term growth. If they were to set up an account using the Hatch online investment tool and put 50% of what they save into investments instead of cash savings, it’s most likely they would see a significant improvement thanks to the power of a diversified portfolio and compound returns.
However, since investing is only for the long term, we’ve not added any contributions to investments until after their house purchase.
Although they are generally good at not overspending, Sally and John felt that if it meant achieving their big goals they would be able to make some small cut backs in the short term. So, in their new plan, we cut their monthly spending by £100 per month, which is about 5% of what they are currently spending.
By making those small changes in spending in the short term, they would then be on track to afford a deposit on a house within the 4 year time frame.
We also recommended that Sally and John look at putting life insurance in place. This ensures that they would still be able to achieve their biggest goal - a financially secure future for their daughter - even if something happened to one or both of them.
Like many new parents, Sally and John struggled to foresee how their earnings might evolve. On the one hand, they both had good prospects ahead of them at work. On the other hand, they were unsure if they would both want to continue working full time once they'd secured the house and Emma had started school. We agreed to conservatively assume no salary progression, and then consider different earnings scenarios in a year's time, to help them start thinking more about their future career choices.
After making these changes, here is their new and improved financial plan:
The results are remarkable. With just a few small tweaks, Sally and John are now projected to have £1,439,461 by the time they retire, as well as comfortably achieving all of their biggest financial goals!
To put that into perspective, this means that at the point of retirement Sally and John will be around £496,457 better off.
Too good to be true?
When you hear about cases like Sally and John, it’s easy to be sceptical - surely it can’t be so easy to make yourself a nearly half a million pounds better off? In part, the big improvement is due to the fact that they are a young couple with decent incomes who have not done much with their finances up to now.
However, it’s also important to note that there are parts of the financial plan which involve taking on some risk. Most notably, whenever you invest money there is a chance that the value can go down as well as up. The investment and pension return in Sally and John’s financial plan is 7% which is about what they can expect to earn - on average, over the long term - given their "risk tolerance" score. If they were much more cautious about investing then their expected returns would be lower.
The amount Sally and John actually end up with at retirement will depend on how their investments and pensions perform, which is impossible to say with certainty. This is one reason financial planning is an ongoing process, not a one off event. As their investment performance and personal circumstances change, Sally and John can update their financial plan and readjust their finances as necessary.
The power of financial planning
Sally and John's story is a really good demonstration of how powerful financial planning can be. Of course, much of financial planning is about adjusting goals, earning more or spending less - but there's just as much to gain from thinking through where you put the money that you save each month.
For Sally and John, setting up an investment account and changing their pension contributions were a no brainer, and they're delighted to know that they are on track to afford their dream home in just a few years.
However, life is complicated and people's goals can change over time. If in the future Sally and John decide that they would like to have another child, or buy a second property, they know that Hatch can help them understand their options and make an informed decision.