Retirement is a cash flow problem. In fact, anyone who has planned their retirement the traditional way, focusing on whether they have enough money, has probably learned the hard way that this approach doesn’t always work.
When the stock market plummets some 35%, and the value of your nest egg drops with it, and interest rates are at an all-time low, you can see how the traditional approach, that relies heavily on statistical probabilities, falls apart.
Our approach, on the other hand, focuses on lifetime income stability and asset preservation. This makes turbulent times not so scary, because we assume they are going to happen and we’re prepared for them.
One of our core philosophies is to be pessimistic about the future in general.
What we’ve noticed over the years as we’ve implemented damage control for people coming from other advisors, is that many advisors tend to be overly-optimistic in their assumptions. Then, when things don’t go their way, the plan falls apart.
You see, there are many variables to estimate when you develop a retirement plan. Things like life expectancy, cost of living, inflation, return on investments, market volatility, and future healthcare costs, just to name a few.
Oftentimes advisors want to impress or “win” your business by showing you a very attractive retirement projection. The thinking is that you aren’t going to hire an advisor who’s plan shows you barely making it, but you will hire the advisor who’s plan shows you having far more money than you’ll ever need!
Unfortunately, many people are persuaded by this. They assume the advisor that shows them having plenty of money must be better. We would argue that sometimes this advisor isn’t even aware that they are potentially misrepresenting things. Most will base future returns on historical average returns and in our experience, this is very dangerous and how most financial planning software is designed!
We suggest a very different approach…
When creating a plan, we want to underestimate every variable that will work in your favor and overestimate every variable that will work against you.
Why would we do this? Because if we can create a plan that works when we take this approach, then the reality will be even better! But if we’re overly optimistic, we increase the odds of the plan not working. And twenty years from now, if the plan doesn’t work, what’s your consolation?
We want all surprises to be good surprises. So we are purposefully overly conservative in our planning approach.
We work with a lot of engineers, and the way we explain this to them is this – our job is to stress the plan as much as possible to ensure it won’t break when/if things get messy down the road. This seems to resonate with those individuals pretty well. Now for those who aren’t engineers, simply think of it as wearing a belt AND suspenders at the same time. The goal is to be sure you don’t get caught with your pants down.
Developing a plan that assumes there will be significant headwinds allows you to have a higher degree of confidence regarding its long term success.