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Most Financial Plans are Dubious Attempts to Predict the Future

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“In preparing for battle I have always found that plans are useless, but planning is indispensable.”

—General Dwight D. Eisenhower

Many flavors of financial, investment, or retirement planning boil down to attempts to predict the future based on the past. Smart people and resourceful organizations develop clever models which give them confidence to market themselves as having an edge over the competition. Yet, after many years of reading every investment book I could get my hands on, talking to numerous players inside and outside the financial services industry, and making my own mistakes in the real world — including surviving at least three major market meltdowns — I don’t believe it’s possible for most people to predict the future or outperform the market. That’s why my investment philosophy, in a phrase, is “spread your assets around, live cheap, go do something else fun.”

Never forget that the future is inherently unknown and unpredictable. Sophisticated and complex attempts to predict it are no better than simple rules of thumb, and possibly worse, for obscuring the view. Any calculation/analysis/prognosis that requires knowing the future direction of the stock market, interest rates, inflation, government policy, or the actions of millions of other living beings is highly suspect. More valuable is having a clear understanding of current conditions, and the skills to handle what may come. Approaching retirement, you are going on a journey into uncharted terrain: would you like a computer-generated map that some academic researcher predicts will represent the terrain, or would you rather learn how to drive a jeep?

I think financial planning should be more about equipping you with the tools for a safe and enjoyable journey, than about predicting your exact route and arrival time….

Conventional financial planning approaches target knowing where you are and where you’re going. A well-known television commercial shows near-retirees shuttling between daily tasks with their “number” (the amount they must save in order to retire) hovering over their heads. There is nothing wrong with having a target. Just don’t put too much faith in it. The future is far too uncertain over the 30-40 year time span of a modern retirement to believe there is a single number or approach that will keep you safe and secure regardless of what happens. I made my number, yet, six months after I retired, it had been reduced by almost 10% thanks to stock market volatility. Then it came back.

It’s more useful to be precisely aware of current reality, know exactly where you are and what forces are currently in play: your current expenses and income. Then you can make the best possible decision for your current stage in life. At some point it may make sense for you to leave the security of a full-time job and seek other avenues for a productive, meaningful life. But, because the future is uncertain, most of us will not reach a point in our 50’s or 60’s where we are truly “set for life” — with no money worries and no need to work at all.

The main function of most financial plans may be serving as a clear artifact that financial planners can charge for on a recurring basis. As General Eisenhower reminds us, and my experience proves, plans themselves are indeed useless: they quickly become outdated and are ignored or thrown away. Sound financial behavior and habits and up-to-date information, on the other hand, are essential.

If you live below your means, you’ll do OK in the end. It is helpful to have a financial dashboard and fuel gauge, so you know if you are going in the right direction, or not. And it’s necessary to adjust and refine your behavior over time. But, as far as defining or predicting the future, your exact time and means of arrival — I think you’re better off relaxing and enjoying the ride!

So, can you think of examples where the best-laid financial plans turned out differently than expected?

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Comments

  1. Good post, which I heartily agree with — on the proviso that we're not saying "give up" but rather "don't sweat the decimal points", effectively.

    "So, can you think of examples where the best-laid financial plans turned out differently than expected?"

    Yep. My father spent years saving into various company related schemes. When he was diagnosed with cancer (slow burn type, thankfully) he wanted to retire earlier than he'd planned, but couldn't because of various internal hurdles (related to tenture) that his strategy had assumed he'd clear no problem.

    He eventually compromised, and retired a little bit earlier — but nowhere near as early as he'd have liked, given his diary date with mortality. I could go into whether he made the right choice about inflation-linked annuities, but it'd be just to depressing.

    Build an income stream (through all asset classes, from stocks and bonds and cash to real estate and even side businesses) that you can switch into ASAP from saving mode into spending mode if required, is my advice. Keep control. If all goes according to plan and you keep saving for longer (and so reinvest the income) then great, you retire with more spending money!

    Good luck with your blog. :)

  2. Darrow Kirkpatrick says:

    Thanks for the kind words and excellent, though sobering, example Monevator. I like your emphasis on building a flexible income stream. It's so important to be diversified in all respects, including withdrawal strategies.