Do you need a written Financial Plan?

Written Financial Plan

Mitchell Barr, Client Associate

You are approaching your mid-sixties and retirement is a year or two away. Pretty soon you are going to enter the largest life transition since having kids or getting married. Your entire world will be different. For the first time in your life the steady stream of paychecks that has been flowing in for the last forty years is going to disappear overnight. The nest egg you have built up over all of the years of hard work will have to last from the day you step out of the office for the last time until the day you and your spouse or significant other are gone. You should probably plan for that.

The question is not if you need to plan for retirement, it’s how? There are two primary ways to go about it. The first involves a comprehensive written plan with all the steps that you need to take to make your golden years shine. In this approach, you get together with your advisor and gather every particle of information about your finances. Then the advisor throws all of that information into a fancy model and says, “Well, the results look pretty good. You just need to stick to these fifty bullet points and you should be smooth sailing all the way to 105.” You get a brick of paper or a website URL to take home and feel pretty good about life. You know exactly what you need to do and exactly how to accomplish it.

Yet, there are several flaws in any plan. For starters, all models are wrong. An advisor can be as precise as possible and supremely confident in their market expectations. They can input your income and expenses down to the penny. But these inputs are just educated guesses about uncertain future events. Thus, the model will be wrong. Models are just attempts to represent reality in shorthand. They are not meant to be exactly right in the first place, just useful. If we know it is wrong, why would you waste hours of effort to write a comprehensive plan based on a shaky model? Then there is the fact that your goals will change over time. You will say they won’t, but they will. You may want to help your grandchildren financially. Maybe you become more charitably inclined. If these types of goals aren’t in the plan, all of a sudden your Retirement Airlines flight has lost cabin pressure and you have to reach for the oxygen mask. Last and most importantly, life is unpredictable. Are you going to live to 75 or 105? What if the stock market goes bust or outperforms expectations? What if congress repeals the estate tax, reinstates it, then repeals it again? The answer to all of these questions is we have no idea.

To solve these problems, another approach is to create a dynamic financial plan. You still start with the shaky model, but don’t draw many detailed conclusions. Instead, we start tuning the model like a guitar. The conversation is more like, “Okay, the results look pretty good. Let’s try to do A, B, and C and then revisit it next year to see where we are at.” There is no house of cards financial plan generated on uncertain assumptions. It’s a continuous process, not a one-time endeavor. Just as in a trip to the moon, where astronauts have to make numerous mid-course corrections to stay on target as life happens. In addition, the list of action items drops significantly from everything you have to do for the rest of your life to a few important things to get done this year.

We can look at one goal at a time as they come up. A new house. More vacations. Buying a yacht. Whatever it may be, a dynamic plan allows you to adjust on the fly, rather than trying to capture everything in one document. This is much easier to digest, especially in the wake of a large life transition. The last thing you want on your first day of retirement is to be flustered by a complicated plan that you feel bound to at a time when you should be enjoying your wealth and newfound freedom from a desk chair. So, when you get a break from the beach or the golf course stop by and see us. We’d love to hear what you want to do next.

 

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