Using Quick Plan: trying out changes to your plan (part 1)

If you followed my earlier post, Using Quick Plan to get started with financial planning, you’re by now aware of the MyFinanceFuture Planner and some of the features of its Quick Plan tool. You’ll also have seen how they can be used to create an initial plan and explore the resulting financial projection. With this knowledge, you can move on to the next stage in your Financial Planning journey: trying out changes to your plan to see how they affect your projected outcome.

Your goal at this stage should be to get a sense for how your financial projection responds to different types of change, and the degree of change needed to “shift the dial” on the outcome. Quick Plan allows you to vary several key aspects of your plan, allowing you to experiment with a range of changes of different types and sizes.

In this post and the next in the series, we’ll go through how you can try out and see the effect of a variety of changes using Quick Plan. Depending on whether your initial projection shows a shortfall or surplus, you could try using Quick Plan to see the effect of moving your retirement date later or earlier; spending less, or more in retirement; or spending less or more now, to adjust the amount you’re saving for retirement. Then, review the results to get a sense for how different changes affect the projection and, by extension, how Financial Planning might be able to help you plan to reach your goals.

Now let’s take a more detailed look at how to try out some changes, and which changes to try to make it a meaningful exercise.

First, create a Quick Plan

If you haven’t had a chance to try out Quick Plan yet, then try creating a Quick Plan (you’ll be prompted to create an account first if you don’t already have one). You can do this either on your phone or a desktop; the phone might be more convenient, and you’ll find the desktop version offers some more detail in the results screen.

Now you have your first Quick Plan – perhaps you created one previously – you can take a more in-depth look at the results, and consider what changes you could try out.

The initial consideration: does the plan have a shortfall?

The first thing to look at in the Results screen is whether the projection has a shortfall – i.e. where projected outgoings exceed funds available from earnings and savings. If so, a shortfall is indicated in the headline under Quick Plan Summary, and one or more red-outlined ‘shortfall’ bars appearing in the Lifetime Expense Funding chart.

A shortfall means, straightforwardly, that at some point in your lifetime – and remember this is the ‘average’ case – your plan is projected to run out of money. This means that – realistically – your initial views about how the future will play out are likely to be too optimistic, and changes are needed for your plan to work.

If no shortfall is indicated in the projection, that’s great news! From a broad, initial viewpoint, your financial situation and assumptions about the future appear realistic and your plan ‘works’ - at least in the average case and based on the assumptions made in Quick Plan. The next post in the series will focus on changes to try out if your plan has a surplus, while the rest of this post covers changes to try if your plan has a shortfall.

If your projection does have a shortfall, then the next question is what could be done to fix it? The first thing to do is work out what type of shortfall (or shortfalls) appear in your projection, since this helps determine the available solutions.

So, what types of shortfall are there?

Broadly speaking, three types of shortfall can appear in a Quick Plan projection. The first is a shortfall in the final years of the projection: this is perhaps the most common type, and generally reflects insufficient retirement savings built-up to cover expected expenses for the full retirement period. The second, a shortfall before retirement, suggests current expenses higher than current income. The third, a shortfall soon after retirement that doesn’t continue to the end of the projection, suggests insufficient savings to bridge the “income gap” between the end of employment and the date certain pension benefits come into payment (e.g. state pension or Defined Benefit pension incomes).

Of course, a projection can have more than one of these shortfalls at the same time, which suggests a combination of changes may be needed to fix them. You can use the Quick Plan Results screen to dig into the reasons for the shortfall(s). Select the Detailed view under Chart Options and hover the cursor over the chart to see the breakdown of income and savings being used to fund expenses in each of the years of the projection. Ask yourself what changed between the years before or after the shortfall - when expenses are fully funded - and the years in which the shortfall is present. Did savings or pension funds run out ? Have pension incomes not come into payment yet ? Or are projected expenses simply higher than projected income?

Once you have a better view of the type of and reasons for any shortfalls in your projection, what changes could you try out to fix them?

Fixing a shortfall at the end of your Plan

There are several changes available using Quick Plan to fix a shortfall in the final years of your projection. The main ones are:

• retiring later, to give more time to save for retirement and a shorter retirement period
• reducing expenses now, so more current earnings are available for saving, and retirement savings are built up more quickly
• planning to reduce future expenses in retirement, so retirement savings last longer.

Use Quick Plan (selecting Edit Plan from the Results screen) to try each of these, starting with small changes and increasing them as needed to see how much of a change is needed to fix the shortfall.

Fixing a shortfall before retirement

Generally, fixing a shortfall in the period before retirement involves reducing pre-retirement expenses in some way, unless there are also opportunities to increase pre-retirement income (through job promotions, side hustles or other career changes) to cover all or part of the shortfall.

Fixing a shortfall soon after retirement

Shortfalls soon after retirement can potentially be addressed by building up more savings in a savings or investment account from which withdrawals can be made at the age the shortfall occurs. This could be an ISA, or – if the shortfall occurs after minimum pension age - a SIPP or workplace Defined Contribution (DC) pension. For most people, minimum pension age is either 55 or 57 (the Normal Minimum Pension Age, or NMPA), depending on age now.

There are several ways to use Quick Plan to see the effect of building-up more funds in an ISA or DC Pension, since - under the assumptions made by Quick Plan – any extra savings are directed first into an ISA (up to the annual ISA savings limit), and into a DC pension thereafter. You can try to build-up these extra savings by reducing pre-retirement expenses or increasing pre-retirement earnings to create a greater annual surplus for investment, and/or retiring later to give more time to accumulate a savings pot. Try a few different sizes and combinations of these to see how much change is needed to fix the shortfall.

Other fixes possible in the Full Planner

As you should hopefully have seen, Quick Plan allows you to try out some of the key changes available and allows you to get a sense of the level of change needed to fix a projected shortfall. There are nonetheless other ways to fix a shortfall not available in Quick Plan, including, for example:

• downsizing to a less expensive home in later life to free-up home equity
• downshifting to part-time working instead of retiring fully, or otherwise taking on some paid work in retirement
• taking a reverse mortgage on your home as a way of releasing home equity
• working out a more tax-efficient savings and withdrawal strategy
• investing retirement savings held in cash in higher returning assets, if you can tolerate associated investment risk.

These and other fixes can be explored in the Full version of the Planner, which we’ll cover in more detail in future posts.

What’s next?

In the meantime, we'll look forward to the next part of our series using Quick Plan to illustrate the value of Financial Planning, which will focus on changes to try making to your plan if your plan has a surplus.

MyFinanceFuture Services Ltd does not offer regulated financial or professional advice.

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