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The Foundations of Financial Planning

What is financial planning? Putting together a financial plan is not about selling some ‘flavour of the month” investment, it is much simpler than that. It is about protecting income for the future, whether that be in the short term, via insurance, or over the longer term by the simple art of disciplined saving.

We have all heard of the biblical references to “feast or famine” and so we can give thought to what it must have been like over 3,400 years ago at the time of one of the most famous famines, during the time of Moses and the Great Exodus. While a lot of the problems may have been down to “divine plague and pestilence”, the fact is that during a famine times were hard. But they would not have been so hard if there had been the infrastructure and knowledge, that we have available to us today, for some forward planning.

Moving to the present, we can consider the analogy of a reservoir as something we can all relate to. In times of sufficient rainfall, the reservoirs are full. We all take it for granted that we have “water on tap” whenever we need it and, seemingly, without limit.

However, during a period of drought, the reservoirs start to empty and the very thing we took for granted is in short supply. When this happens, there are always questions raised as to why no provision was made for this eventuality, and why  people weren’t  persuaded to save water when the reservoirs were full.

If we now put this into a financial context, think about the longest drought of all- retirement. The income that we took for granted stops, but the need for income is still there.

The foundations of financial security should be built as soon as possible. Spending a little less income and saving a little more over a prolonged period of time will fill up the reservoir of capital to provide income during the retirement drought.

Let us consider someone aged 30 on a salary of 25,000 Euros a year . If we assume modest increases in pay of 3% per annum to retirement, then the salary at 65 years of age will be 71,500 Euros. If there is nothing in the reservoir, this person is going to have to rely on state benefits. Statistically, there is a good chance this drought will last for up to 30 years. A long time to be on water rations!

Converting water to savings’ calculations* (we will leave the conversion of water to wine to others that are more qualified)-

Current Salary               25,000 Euros
Salary at Retirement      71,500 Euros   

Saving 10% of gross pay per annum 

Potential savings at 65 =  250,000 Euros which could buy a lifetime income of 14,500 Euros

Saving 15% of gross pay per annum 

Potential savings at 65 =  440,000 Euros which could buy a lifetime income of 25,500 Euros

Saving 20% of gross pay per annum 

Potential savings at 65 =  565,000 Euros which could buy a lifetime income of 33,000 Euros

*( I have assumed a 3% inflation rate and a 3% return on investments and have used current annuity rates- for example only)

In the final example, above, it shows that with modest investment returns someone can expect to receive half of their pay during retirement.

While this is not “Manna from Heaven”, it does give “Food for Thought”.

About the author: Christopher Lean is a consultant at Square Mile Financial Services ( and an Associate of the Personal Finance Society ( Chartered Insurance Institute).


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