How are you supposed to create a financial or retirement plan if you have no idea what the future holds? Sounds impossible. Everything changes….right?
- Where you be living 10 years from now?
- Where will you be working 10 years from now?
- What will your health be like?
- How much will it cost you to live?
- How much will you have saved?
- How much will your investments grow?
- What’s going to happen to the stock market? Interest rates?
These questions are just the tip of the iceberg. Chances are good that your life will look completely different just a few short years down the line. If I asked you 10 years ago what your life would look like today, would you have been able to accurately describe it? Probably not.
So, given that so much of our lives shift over a relatively short period of time, how is it possible to plan for a future so far away? Many people don’t even try. I understand that but it’s short-sighted and very dangerous. Here’s how to plan despite extreme uncertainty.
Embrace Imperfection
You don’t know what lies ahead with absolute clarity. That is true. But that’s no reason to forgo planning ahead. In fact, you don’t run projections to predict the future. A good plan isn’t really about tomorrow. It’s structured to tell you what to do today to maximize your situation in a future that is largely unknown and unknowable.
Let me give you a couple of examples.
When I started college in 1975 I had no idea what I wanted to do after I graduated. But I knew that I wanted to stack the odds of finding work after I graduated highly in my favor. When I started school the country was just finishing up a particularly ugly recession and I wanted to be as employable as possible. As a result, I studied accounting. I figured that with an accounting degree I could find work no matter what. It turned out that I was right.
So when it comes to financial projections, the best approach is to plan conservatively, hope for the best and verify as you go. Let’s take a look at this one piece at a time.
The first part of the exercise is to figure out what you need to do today in order to have the best chances of achieving the best possible outcome down the line. After you run some projections based on your current situation, you might learn that you need to spend less, save more and invest differently in order to achieve your goals. Your make those changes now and track your progress to see if you are on the beam or not. If not, you fine tune and adjust as you go.
I just met with a wonderful couple (30 minutes ago) who went through this exercise with me 8 years ago. Back then, we ran some projections and determined they needed to cut spending, save more and invest better. But when we ran the plan we saw that even with their best efforts, it didn’t seem possible to hit their goals. According to our projections, they’d probably have to sell their home and start renting when they reached age 65.
Well things worked out far better than expected because they realized what needed to be done and they took it to heart. They were able to save more than we projected and the market did better than planned as well. As a result they don’t have to sell their home now. That’s because they implemented best practices immediately and over time it worked out well.
In other words, they tried to make the best of the situation. They did what they could to have the best result possible and in this case they overshot the mark. No problem. Had they not done the planning, they wouldn’t have implemented the changes and would be renters today.
Of course you don’t want to go overboard. If you determine that more investing and less spending are good ideas, don’t go hog wild and cut back to the bone. I’m not a fan of this approach. It puts off your living and happiness and is just too extreme. Silly business.
Informed moderation is the key my Pilgrim friend – informed moderation. Do the best you can with what you have and understand what the likely results of those financial behaviors are likely to be. Make adjustments each year by verifying you are on the right track.
You can’t possibly know what lies ahead in the future. But you can run some simple projections to determine what your current financial behaviors are heading you towards. If you don’t like the direction, make the changes.
Are you planning ahead? If not, why not? Is a lack of certainty keeping you from financial planning?
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