What is the Planning Gap

What is the Planning Gap?

You may recall back in 2008 ING ran a series of commercials showing people carrying around a big orange number that was supposed to indicate the “number” they need to have saved in order to be able to retire comfortably. Today’s world is a little more complex than just working toward achieving a dollar amount that will carry you through retirement.

Traditionally there were three components of retirement income that most people relied upon. The first component, an employer defined pension, has all but disappeared for most private sector employees. The next component is Social Security. While Social Security is still a very valid component of retirement planning, there is some uncertainty as to its future in terms of what changes may be necessary to maintain the program. That leaves personal savings as the third component.

Personal savings must be added to whatever you receive from these first two components to be sufficient enough to cover likely increased health care expenses during retirement as well as maintaining your lifestyle goals. So, how do you go about determining what goals you need to set and how to achieve them?

Having a financial plan is a key first step in reaching one’s investment goals, but to achieve those goals it will be critical that you follow the plan. A financial plan typically consists of investors’ goals — commonly for retirement savings, but also for college savings, insurance needs, taxes and major purchases. Having a written plan with specific goals and formal steps to take should increase the likelihood that you will achieve those goals. Those without a formal written plan may instead have vague notions as to what their financial aims are and how to attain them.

So, in order to take in to consideration the three components of creating a retirement plan that allows for a dignified and comfortable retirement, it is important to create a written financial plan. The plan should also be inclusive of your expected expenses, including health care, your living expenses as well as your lifestyle goals. Lifestyle goals can include plans to travel, a second home, supporting your favorite community or charitable organization, taking up a new hobby, or any other such goal.

The “planning gap” is the difference between what you as the investor think and how many people address developing a financial plan. Many investors approach building a plan by thinking about how much they need to save, worrying that they may not have enough to last through their retirement years while still living the lifestyle they desire.

A true financial planner will take the time to learn what your goals are. How much you have saved now and what you will save into the future. What resources you will have available to support your plan and what additional resources could be brought into your plan. They will consider your expenses and lifestyle needs. Then a true financial picture can be developed that allows you to make adjustments as you move forward to keep you on track.

In order to stay on track with your financial plan you need to review the plan on a regular basis. The vast majority of investors with a written financial plan review it at least annually, and many do so more than once a year. Working with a true financial planner to develop, monitor and adjust your plan on an on-going basis is one of the keys to living the life you dream and being able to feel comfortable about your retirement years.

Written by:  Dennis Kelley, Managing Partner

These are the opinions of Dennis Kelley and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice.  Investing involves risk.  Depending on the types of investments, there may be varying degrees of risk.  Investors should be prepared to bear loss, including total loss of principal.  The strategies discussed herein are not designed based on the individual needs of any one specific client or investor.  In other words, it is not a customized strategy designed on the specific financial circumstances of the client.  However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model.  You are also provided the opportunity to place reasonable restrictions on the securities held in your account.