Take Back Retirement
Here’s a Secret: We’re Guessing, and That’s OK
As human beings, we crave certainty. We want to know what’s going to happen and to know that we’re going to be okay. When looking into the financial future, we have to realize that a key ingredient of any analysis is assumptions or, to be blunt, guesses. Stephanie and Kevin tell us, however, that guessing isn’t wrong. It serves a purpose. It’s an ongoing exercise that narrows down the cone of uncertainty from experience to experience, week after month after year.
Planning is a living, breathing, ongoing thing. Do yourself a favor and relax, even if the path ahead is still a little foggy. An imperfect execution is better than waiting for the “perfect” plan to come together (hint: Don’t count on it!).
- Dealing with uncertainty while working with your financial planner (3:42)
- What planning a trip to Disney World can teach us about the value of making guesses (7:40)
- Thinking like a weatherman to narrow the cone of uncertainty (11:36)
- “Relax! Give yourself some latitude to change your mind.” (14:30)
- Overcoming paralysis by analysis (17:12)
- Lighten up, Francis (18:56)
Stephanie: :40 When my kids were little, we went to the pediatrician a lot. I had chosen a group practice where there was a whole bunch of different doctors. And for a while, we went to this one doctor and she was very certain about her diagnosis. She would say, Oh, this is the situation. It’s obviously this diagnosis and here’s the treatment. And I would feel good about that. And I’d go home and I’d get the stuff from the pharmacy or I’d follow her directions. And sometimes nothing would change. And we’d be back with the kids still feeling miserable a few days later. And the next time she’d say, Oh, it’s diagnosis B. And here’s the plan. And I thought, why was it A few days ago? And now it’s B. And then once we went to another doctor and this doctor said, Hmm, well, here’s what I’m seeing. And here’s the range of possibilities. It could be A, it could be B, it could be X. And here’s what I’m thinking we should do. And here’s what to watch for that will help us make the decision. And I thought, Oh my gosh, this is so much more helpful. Acknowledging the uncertainty.
Stephanie: Coming to you semi live from the beautiful Westlakes office park in suburban Philadelphia. This is Stephanie McCullough and Kevin Gaines of Sofia Financial and American Financial Management Group say hello, Kevin.
Kevin: Hello, Kevin. So, true story. As opposed to all the false stories I like to tell.
Kevin: Several years ago, little Kevin was sitting at the dining room table with his parents watching them meet. Because yes, I was into financial planning when I was a kid. Weird kid, what can I say?
Stephanie: Of course you were.
Kevin: [laughter] And , this guy in his three piece suit comes in and is talking to my parents about financial planning. And he takes down all this information. And he comes back a week later with this hundred – hundred and fifty page binder saying, this is your financial plan *thud*, as it landed on the table. And I remember thinking, wow, that’s really impressive. And now, shows back to how the industry has changed. Back then, they did all that to sell you a $40,000 mutual fund with a five and a half percent upfront load.
Kevin: So, they got paid. That was the whole process. That was the implementation of the plan, but that’s another episode. But there was this huge plan. And through nobody’s the moment the money was invested. That plan was wrong because the fund didn’t work exactly as predicted within that first month, I may have made a little bit more money may have lost maybe not as much. I forget. It doesn’t matter. The fact is, the moment reality started, that plan was wrong, which is why we like to talk planning. Right, Stephanie?
Stephanie: 3:41 Yes. So, there’s this kind of paradox in what we do for a living. We are trying to help our clients come to some decisions about what to do for their financial future. And as human beings, we crave certainty. We really want to know what’s going to happen and to know that we’re going to be okay. But, to Kevin’s point about the giant brick of paper, that plan, it’s obsolete as soon as it’s printed, because in order to make these projections into the future, this kind of answering the key question that all our clients ask us is, ‘do I have enough money to do the things I want to do?’ In order to come anywhere close to answering that question, we’ve got to make what we call assumptions, but let’s call them what they are. We have to make guesses about some really important things. Number one is how long might you need money? Which is a very kind way of saying, how long will you be alive? We’d have no clue. Nobody knows that. But in order for us to answer the question, ‘are you going to have enough money?’ We’ve got to make a guess about that. There’s a lot of guesses we have to make.
Kevin: And it’s not just how long you’re going to live or not live. That’s going to be uncertain. We don’t know what tax rates are going to be, what investment returns are going to be, what inflation is going to be. A lot of this stuff depends on what the government’s going to do and who the hell wants to make a living trying to do that with any degree of certainty. I mean, come on.
Kevin: We have all these assumptions and we make our best guess. We know it’s going to be wrong, but it gets us into, what would you call it, Stephanie? Like a frame of mind or a direction where we want to go and give it some parameters or guard rails that we’re working within as we’re making this journey.
Stephanie: Yeah. Yeah. I think it helps narrow the range of possible outcomes, right?
Stephanie: One of the hurdles I see to people even working with a financial planner or a financial advisor, is that we’re asking them to come up with some numbers and some guesses, right? One of the things that we’re going to ask people, if they say, ‘do I have enough to retire?’ We’re going to say back to them, ‘well, how much money do you need to live on?’ And how the heck are you going to know that? Especially if retirement’s, quite a ways away. One of the things a client told me recently – she talked to another financial planner before she decided to work with me. And, she was doing kind of the intake process, so to call it. They emailed her a 35-page questionnaire,
Kevin: 35 pages?
Stephanie: Oh yeah. PDF. First of all, she had to print it herself.
Kevin: Oh, PDFs. So … jeez.
Stephanie: So, she was expected to print this and fill it out completely and send it back in before they had the first meeting. Well, to me, that’s a huge disservice, but it’s a huge hurdle to actually getting anywhere because I’m sure it asks things like, ‘what do you expect your retirement living expenses to be?’
Kevin: That’s intimidating.
Stephanie: Yeah. Yeah. Intimidating. And of course, it’s a guess, right? Are you going to buy that farm in Vermont? Or are you going to go to the beach? Are you going to stay where you are? We don’t know these things, but that’s okay.
Kevin: 7:16 And I come up with this situation, talking to clients, trying to, I don’t want to say stress that we’re guessing, but trying to help everybody relax. Like, listen, we’re doing the best we can here. We know things aren’t going to quite be right. But we want to have an idea of what we’re doing. So, I like to tell this story or analogy, I guess, but there’s a lot of truth to it. We live here on the East coast, outside of Philadelphia. It’s not uncommon for families around Philadelphia to take a drive South to that wonderful, magical land of Orlando, Florida, specifically Walt Disney World. Well, here’s the problem. Any parent who’s done this drive down interstate 95 will tell you, there’s this little stop just south of the North Carolina, South Carolina border cleverly called ‘South of the Border.’
Kevin: And this place is wonderful if you’re a kid. I mean, it is the tackiest, most over the top tourist trap you’re ever going to come across. And I still finally remember the place. I’m not bashing it. I loved the place as a kid. But, if you’re not prepared for this as a parent, you’re driving, all of a sudden you start seeing it in Virginia, you start seeing the billboards advertising. Pedro says, ‘in 300 miles, you’re going to want to get food and gas and play in our amusement park in miniature golf,’ all these things…
Stephanie: 9:00 Endless orange, yellow, and black billboards with silly puns and little cartoon characters. Totally fun and appealing to kids or college kids. I won’t tell you how many times I stopped there in college?
Kevin: Well, let’s be honest. There’s been one or two guy trips where we’ve driven down there and it’s like, eh, what the hell, let’s take a detour.
Kevin: And next thing you know, four hours later, we’re still at this place acting like idiots.
Kevin: But yeah. You can say with certainty, we’re leaving Philadelphia at 5 AM and we’re going to stop, here and here before we get to Orlando, but you don’t necessarily know what you’re going to come across. So, really you’re guessing how long it’s going to take you to get to Orlando, because maybe you don’t know about Pedro.
Kevin: Telling that story to people, it kind of helps people get in the right mindset of yes. Okay. So, I understand the need to guess. We don’t know what’s going to happen, but we still need to have an idea of what we’re doing.
Stephanie: Right. Because if you didn’t have any idea how long it might take you to get to Orlando, you might have an unrealistic expectation that you could do the whole trip, enjoy Disney and get back in three days. Well, that’s probably unrealistic. Or you might think, ‘Oh, that’s way unrealistic. We can’t go at all,’ when maybe you could. So, you to know kind of the range of possibilities. And I feel like there is value in making these guesses. Here’s the thing I tell clients all the time. We’ve got these software programs that, basically they’re good at math. We plug in, here’s the things we think you’re going to need money for. Here’s how much money you’re going to need, and when. We plug in how much you’ve saved so far, how much you plan on saving every year. We plug in how long you’re going to live. Right? Because we’ve got to guess on that. And then the program comes out with a number, a percentage, likelihood of meeting your goals. And I tell people all the time before I push the magic button that comes up with that number, this is going to be wrong. The one thing I know for sure, is that this is going to be wrong because there’s no possible way we guessed all of these things correctly, but it’s still a valuable exercise.
Kevin: And it’s important for people to understand that. That we’re talking about a range of possibilities that will allow you to do what you want to do. Well, think about when you’re watching the weather, especially between June and November, and you see the hurricanes. They call it the cone of uncertainty.
Kevin: 11:51 We know hurricane is going to be most likely somewhere within this range. Is it going to go over the Florida panhandle or is it just going to strike, say, a little east of new Orleans? In the grand scheme of things, it’s not that big of a difference, but if you live in Pensacola or Lake Charles, it makes all the difference in the world. And that’s what we’re doing here is we’re trying to make that cone of uncertainty as narrow as possible. But we know there is that uncertainty and we want to really stress that guessing isn’t wrong. It serves a purpose.
Stephanie: And it gets back to this idea of a financial plan, right? That brick of paper, that the guy in a three-piece suit delivered to Kevin’s parents all those years ago, or financial planning as a practice, as an ongoing exercise where, yeah, we make guesses today, but then we revisit and we check in and every year that goes by is another year that we know what happened, right? It’s one year less of uncertainty because we know how much you were able to stock away in your 401k. And we know how much you had to spend on your kid’s braces. And we know maybe, what your job security is looking like with a little bit more certainty than we had last year. So, it is an ongoing exercise. And you’ve got to build in room for this uncertainty. One of the hardest things for people is imagining what their future is going to look like, right?
Stephanie: Years ago, I met with a client and we were trying to decide how to invest her IRA. And I said, ‘okay, well, what’s this money for?’ And she said, ‘retirement,’ and I’m like, ‘all right, what does retirement look like to you?’ And she kind of went ‘uhh, I don’t know.’ People just told me to save for retirement, but she hadn’t even given herself the luxury of starting to picture something. And it’s okay if what she started to imagine changed along the way. I had this friend, I swear, every time I talked to her, she’s got another very different, but very detailed, well thought out plan for how the future of her life is going to pan out. One time, I swear she was gonna move to Italy. And then I talked to her three months later and she was going to buy a beach house in New Jersey. I was like, ‘wait, what?’ The thing is, with either of those plans, she was saving money for the future goal. And it’s perfectly okay if the label on that account for the future goal changes, but hey, she had put some money away.
Kevin: Within her cone of uncertainty.
Stephanie: Yeah, yeah.
Kevin: I don’t know if I would say, this is the key point we’re trying to make, but relax. Give yourself some latitude to change your mind.
Kevin: We’re just not saying guessing because we’re going to be wrong or we won’t be right enough. And by right enough, we’re talking about, ‘Oh, what if you spend too much money?’ What if you win the lottery? All of a sudden your plans may change for the better.
Stephanie: Right. Positive surprises are possible as well.
Kevin: Right. It could go either way. And you’re going to change your mind on things. Even when 70, 75, it’s like all of a sudden, ‘you know, I now want to take up skiing, or I want to travel around the world.’ Or, something you didn’t think you wanted to do even five years ago, right?
Stephanie: 15:18 To me the value of doing this whole guessing exercise is that it narrows the range of possible outcomes.
Kevin: So Stephanie, you’ve gone on vacation in the islands before, right? Caribbean somewhere. St. Thomas, Barbados. One of them.
Stephanie: I wish I could go today.
Kevin: Well, today the weather’s a little bit on the nice side, but in a couple of weeks, I’m definitely gonna want to be figuring this one out.
Kevin: But , think about packing for Barbados. You’re not going to take your entire closet with you. You’re not going to take your winter jacket. You’re not going to take your skis. You’re not going to have snow in Barbados. And at least we certainly hope you’re not. So, you can eliminate those items from consideration in packing. Well, fine.
Kevin: You’re going to want to pack swimsuits. You’re going to want to pack a couple of things to wear out to dinner, maybe.
Stephanie: Suntan lotion.
Kevin: Sunscreen. Hey, there’s plenty of stuff. Especially if you’re me, definitely need the sunscreen.
Kevin: And maybe you will take a sweatshirt because, you get the breezes, it’s going to be cool one night. So yes, there is uncertainty. It’s what you’re going to have. You don’t know if it’s going to rain the whole time. Maybe you want to have some preparation for that. But what that means is you’ve narrowed down what you need to bring with you. That’s what planning is doing. As things constantly change and evolve, unlike going to Barbados, where you have to make your predictions ahead of time, we can change as things change. You can make alterations to your quote-unquote plan because it’s living, breathing. It’s an ongoing thing.
Stephanie: 17:06 Right. And I kind of like looking, when you’re looking at your whole closet on what to pack for a vacation, right? I think some people get that paralysis by analysis. When they look at the whole range of financial vehicles out there in the world, and they look at IRAs and 401ks and HSAs and all these abbreviations and all these mutual funds and all these stocks and bonds, and they get a little bit frozen like, ‘Oh, what the heck should I do?’ They see their paycheck coming in. There are dollars. What should they do with their dollars so that they have some reasonable assurance that they’ll be okay in the future?
Stephanie: That’s what planning and guessing is trying to help you do – narrow the range so you have an idea of the actions that are going to help get you where you want to go. I think the big message today is don’t freak out if the numbers don’t turn out just right. Don’t worry that getting your numbers, that may be a financial planner is asking you for, don’t worry about getting them exactly right from the start. Planning imperfectly is way better than waiting until you feel like you’re ready to plan perfectly because the perfectly part is really an illusion.
Kevin: Let’s go with the old saying, ‘if you want to make God laugh first, tell him your plan.’
Kevin: I mean, that pretty much sums it up.
Stephanie: 18:32 Yeah. I really personally prefer a professional who’s going to tell me upfront what the uncertainties are and acknowledge them and help me plan for the various possibilities.
Kevin: ‘What can happen?,’ not ‘what will happen?’
Stephanie: Yeah. Because we can always adjust along the way and we can talk up front about how we can potentially make those adjustments.
Kevin: So, even if you’re doing this on your own, lighten up on yourself. From a classic piece of wisdom, ‘lighten up Francis.’
Kevin: Don’t beat yourself up on trying to get everything to the penny because even if you do magically come up with that precise of a number, in six months it’s probably going to be the wrong number anyway.
Stephanie: Totally right. Thanks for being with us this week. Talk to you next time. It’s goodbye from me.
Kevin: 19:29 And it’s goodbye from her.
Disclaimer: Investment advice offered through Private Advisor Group, LLC, a registered investment advisor. Private Advisor Group, American Financial Management Group, and Sofia Financial are separate entities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investments may be appropriate for you consult your financial advisor prior to investing. This information is not intended to be substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.