What If? -The value of scenario planning when thinking about retirement

Estelle Scholtz- Mare, Head of Marketing for Financial Wellness at Momentum.

Economists do it, share analysts do it and almost everyone who owns a business does it. We are talking about scenario planning. Scenario planning has always been a tool used by armies to gain strategic advantages over their enemies. As a business tool, it was first used by Shell Oil to predict and manage the oil crisis in the 1970s.

Scenario planning asks the question “What If?” When applied to your personal finances, it can give you valuable insights into how your behaviours and actions will affect your ability to save, invest and retire.

Scenario planning is a tool to improve the quality of your decision making and it helps to alert you to the potential pitfalls of your decisions. With scenario planning, you’re in a position to analyse a variety of future possibilities. While this may sound daunting, the good news is that financial planning software has been designed to take care of the number crunching. Virtually all financial advisors have access to this software and they can help you to work through the possibilities for your retirement strategy.

While it is always advisable to seek the assistance of a financial planner to assist you with a retirement plan, you can log onto Momentums Financial Wellness section at www.momentum.co.za and do some of your own calculations. When it comes to retirement, the biggest obstacle to success is knowing what you need to do to get there. By using the MySmarts tool you can work out how much you would need to save in order to retire or how much you would need to save to reach a specific goal. Sometimes people are embarrassed about their lack of financial knowledge, the tools help to build confidence and assist people to ask the right questions.

To highlight how important it is to do these calculations, consider this. If you are 35 years old and earning a salary of R50, 000 per month and would like to retire at 65 with the equivalent income and let’s assume you started saving R4000 per month, with no existing savings in place. You would have a shortfall of around R26, 000 per month in retirement. To prevent this shortfall you would have to increase your savings to R8200 per month. Most individuals who do these calculations are surprised at the results and the surprise is not usually pleasant. While it is no fun to find out that you will have to significantly change your lifestyle to save for retirement, it is far better to know now than be faced with the problem when you are no longer in a position to fix it.

One of the most common reasons people give for not saving is tax and Government is acutely aware of the problem of our reluctance to save as a nation. In response to the fact that less than 6% of the populations will be able to retire comfortable, Government is on a mission to get people to save. From March 2015 individuals will be able to open a tax free savings account. Treasury has said that collective investments schemes. i.e. unit trusts and ETFs (exchange traded funds) will also qualify as tax-free savings accounts. However there are some limitations, such as products that charge performance fees will not be included. There will also be a limit of R30, 000 per year and a maximum of R500 000 total investment. This is good news especially for young people who want to kick start their savings.

Ask your financial advisor to work out the best way totake advantage of this new legislation and how it can be incorporated into existing savings strategies. The value of doing these calculations is the ability to tweak your finances to ensure that you know what it takes to become financially well. Other calculations you can do by using the MySmarts tools is to work out how much your car and home instalments will increase by -if there is an interest rate hike. The other way you can use the tools is to see how much money you will save if you reduce the terms of the loans or add in extra cash.

In a nutshell knowledge is power and the MySmarts tools give you the ability to gain insights into how the various elements of your financial life fit together. This helicopter view will give you a clear picture of your financial wellness. Work with your financial advisor to fill in the gaps and review your situation annually. Remember that scenario planning is not just a means to help you avoid threats; it also helps to highlight opportunities.

Questions & Answers

Question: What is the value of scenario planning in a financial plan?

Answer: Scenario planning asks the question “What If?” When applied to your personal finances, it can give you valuable insights into how your behaviours and actions will affect your ability to save, invest and retire.

Question:How does scenario planning work?

Answer: Scenario planning is a tool to improve the quality of your decision making and it helps to alert you to the potential pitfalls. With scenario planning, you’re in a position to analyse a variety of future possibilities.

Question: Don’t financial advisors do this for you?

Answer:Yes virtually all financial advisors have access to this software and they can help you to the through the possibilities for your retirement strategy.

Question: Can I do the calculations on my own?

Answer: Yes you can and should. While it is always advisable to seek the assistance of a financial planner to assist you with a retirement plan, playing around with the figures can be a valuable learning curve and also give you an idea of what you will need to do reach your goals. It will assist you to have a more meaningful conversation with your financial advisor.

Question: Where can I go to financial these calculators?

Answer: You can log onto Momentums Financial Wellness section and do some of your own calculations. When it comes to retirement the biggest obstacle to success is knowing what you need to do to get there. By using the MySmarts tool you can work out how much you would need to save in order to retire or how much you would need to save to reach a specific goal.

Question: What kind of learnings can you expect from using the calcualtors?

Answer: To highlight how important it is to do these calculations, consider this-if you are 35 years old and earning a salary of R50, 000 per month and would like to retire at 65 with the equivalent income .If you started saving R4000 per month at 35 with no existing savings in place, you would have a shortfall of around R26, 000 per month in retirement. To prevent this shortfall you would have to increase your savings to RR8200 per month. This insight could make the difference between wealth and poverty in retirement.

Question: What other calculators are in MySmarts?

Answer: MySmarts has a variety of other calculators including home loan and car calculators. You can work out how much your car and home instalments will increase by -if there is an interest rate hike. The other way you can use the tools is to see how much money you will save, if you reduce the terms of the loans.

Question: Are the calculators only useful for evaluating risks?

Answer:Not at all, The helicopter view that the calculators give you paints a clear picture of your financial wellness and scenario planning will help you to spot opportunities as well as threats.