Financial Needs AnalysisFinancial Needs Anaysis (FNA) is defined as a process to identify individual financial needs in orderto strategise an investment plan that meet such needs and financial goals. Before I go into detailsabout FNA process, let me explain the three broad categories of financial needs;(i) Accumulation Needs It is defined as a future financial need that one desire to set aside. Themotivation to accumulate a sum of money in future include children education, starting a business,property investment, buying a car, retire early or giving to charity.(ii) Retirement Needs It is defined as financial need that provide fund to support our life after ourretirement. When we retire, our pension or social security benefits begin but our earned incomeceases. Our working expenses reduce but our leisure and medical expenses increase.(iii) Protection Needs It is defined as financial obligations that we need to fulfil upon death,disablement, contracting critical illness, loss of or damage to property and/or when a personal liabilityarises.Having a general idea about the three main categories of financial needs, let me go through theprocess of Financial Needs Analysis:(1) Fact finding --> (2) Identify and quantify financial needs --> (3) Identify investment products thatmeet financial goals --> (4) Periodical review of financial needs1. Fact FindingGather personal details, employment details, number of dependents, financial information, existinginsurance policies, retirement needs, saving goals, objective and investment preference. Personaldetails such as age, gender, martial status and smoking habits will offer us a preliminary assessmentof the types of financial products that will likely suitable for us. Employment status enables us todetermine if income protection is needed for high risk job, and the ability to commit long to mediumterm investment product. The number of dependents will determine the amount of additional financialsupport. The more dependent we have, the greater the number of years we have to support them,which means we need more life insurance and income protection. Financial information such asmonthly income will help to determine the continuing income needed in the event of death, disabilityor retirement.Expenditures information will help to determine the level of income needed for the family to survive inthe event of premature death of the breadwinners, and to estimate the funds available for investment.Assets and liabilities information helps to determine net worth, which enable us to decide on theamount of funds for investment or to adjust our lifestyles to reduce liabilities. Existing insurance policywill serve as a starting point for any further insurance products. The objectives and investmentpreferences will help to determine our attitude towards investment risk, which classified into RiskAverter, Cautious, Balanced and Risk Seeker. Retirement needs information enables us to determinethe monthly amount in todays dollar that we and our dependents need to live on retirement.Generally, most singles need about 50% to 60% of their pre-retirement income to maintain sameliving standard after retirement. The percentage increase to 60% to 70% for married couples with one
retiree. Saving goals information helps to determine if the funds earmarked for various financial goalsare adequate.2. Identifying and Quantifying Financial NeedsAfter we have gathered all the data through facts finding, the next steps of FNA process is to analysethe data to identify and quantify the financial needs. We should pick up weaknesses that cannegatively affect the financial objectives. For examples; amount of debts, investment portfolio,existing insurance products, living within means, investment time horizon, liquidity need, childreneducation and risk profiles. Determine which objectives should be given higher priority. Three factorsshould be considered when analysing objectives:• Establish if the objective is short-term or long-term. Short-term objective is more appropriate for retired person who may wish to increase income produced from investment capital. Long-term objective is more suitable for someone who want sufficient fund to send his new-born child to university in future. However, objectives can be both long and short term.• Establish if the objective is for the benefit of us or for others, such as dependants. For example, the objective may be passing our estate to our grandchildren in the event of death. Alternatively, the objective may be to retire early.• Prioritise the objectives. For example, we may want to invest a second property but to achieve this objective; it may detriment a reasonable income in retirement. It is important to tackle each financial need and uncover those needs that need immediate attention.Once all the financial needs are identified and prioritised, each need must be quantified. The ways toquantify retirement, protection and accumulation needs are different. There are two methods toquantifying retirement needs, namely the replacement ratio method and expense method. As forprotection needs, the method include determine the sum of total liabilities and immediate expensesrequired at the time of death and the amount needed for dependants as long as needed. Multipleapproach and needs approach are two common approach used to quantify the amount needed fordependants. For accumulation needs, the approach is to find the future value of the target amounttaking into consideration of inflation. After we have quantified the data, proceed to next step to identifyinvestment products that meet financial objectives.3. Identify Investment Products that meet Financial ObjectivesPoints to consider includes investment objectives, product suitability, affordability, taxation, tax relief,rick tolerance, pension schemes, prioritisation and effect of inflation and time value of money.Investment Instrument that meets accumulation and retirement needs includes Money MarketSecurities, Fixed Income Securities, Equity Investment, Derivative Instruments, Property, Unit Trusts,Whole Life Insurance, Endowment, Investment-Linked Products and Annuities. Investment productsthat meet protection needs include Term Insurance, Whole Life Insurance, Endowment Insurance,Investment-linked Life Insurance, Riders, Critical illness Insurance, Long Term Care Insurance,Medical Expense Insurance and Managed Healthcare Insurance and Disability Income Insurance.General Insurance products that meet protection needs include Fire Insurance, Household/Houseowner Insurance, Personal Accident Insurance and Personal Liability Insurance.
4. Periodical Review of Financial NeedsThe process of identifying financial needs does not stop with implementation. Our financial needsmay change over time. It affects our initial investment plan, as they may no longer be adequate. Forexample, a steep fall in price of equities would signal that a review of our investment portfolio andsaving is required if we invested substantially in equities. Regular review of financial needs ensure westay on course to our financial goals.For more information about Financial Needs Analysis, go to [http://growmoneytree.com]Over 50 life insurance