I’m still working virtually from home. Thank you all for meeting with our office staff through your computer.
I recently had an earlier morning meeting with a young couple (by ZOOM) who were considering working with our firm. Their question – How do our financial plans work? My answer – financial plans don’t work.
Initially, my statement seemed not only odd; but surprising, to say the least. Don’t we create plans? Here’s what I wanted them to understand. Most advisors will plug in an amount of money you’re beginning with, an amount of money that your adding to it regularly and assume some rate of return, over time. Typically, the advisor who can make-up the biggest number wins; but do their clients?
Here's the problem with a financial plan; it assumes consistent rates of return, consistent costs due to inflation, consistent tax legislation and consistent world events.
Let’s take the last one first. Was a world pandemic factored into your financial plan? I’m not hearing any ‘yes’s’.
How about tax legislation? The tax policy center of the Urban Institute & Brookings Institution (https://www.taxpolicycenter.org ) lists so many major tax changes over the years, that they actually break them down in ten-year increments to make it easier to research; and think about this, how will taxes need to change in the future due to the recent 2.2 trillion dollar package to stabilize the US economy. Will it cause taxes in the future to go down, stay the same or go up?
Inflation is next. Advisors often refer to an ‘average’ inflation rate; but we don’t live in an average world. The US Bureau of Labor Statistics ( https://www.bls.gov/cpi ) research reminds us that we had double-digit inflation in the earlier 1980s, while today, we’re near zero. The money you need in retirement can change a lot if inflation would be ten percent in the future and not zero. An average three percent isn’t close to either of these numbers.
Then there’s none-correlating costs, like gasoline. If you’ve filled your car recently you may have done it for less than a buck a gallon. Yet, back in 2011 according to gasbuddy.com (https://www.gasbuddy.com/Charts), gas was almost four dollars a gallon. Can you tell me what the price of gas will be in 2030, or for food, or even to heat your home?
Then lastly, which is usually the first thing people think about when establishing a plan? It’s a rate of return. Late last year I visited with a young man who was out of college for a couple of years, has a good job as an engineer and had the first year of a 401k under his belt. When I looked at his year-end numbers, he was thrilled when I calculated a twelve month return in excess of twenty percent. What he had a hard time digesting was my very next statement when I said, your annualized rate of return moving forward from today will never be this high again for the rest of your life. Now, you might be asking why. That’s because math and time simply will be unable to sustain that high number. Today, I hope he remembers what I said just four months ago.
Financial independence requires more than a plan, because unexpected events like pandemics occur, taxation is forever changing, inflation is a moving target and rates of return are practically impossible to predict. So, what can you do? Stop planning and start strategizing.
Do you remember the Tom Hanks movie about Apollo thirteen? You ‘know, “Houston we have a problem”. At one point the NASA engineers came into a room and from a cardboard box dumped a pile of hoses and duct tape onto a table. The leading engineer said, this is what the astronauts have onboard. We have to figure out a way to get these boys home.
NASA was required to throw out their original plan and create a strategy which was unique to the situation at hand; and that’s how you get to the moon and back.
Thank you and be well.
