Financial Planning

Why traditional financial planning is completely wrong

More data does NOT make your plan more certain or accurate

Traditional financial planning utilizes a capital needs analysis where advisors create detailed cash flow based on laundry list of assumptions (including income, expenses, taxes) over a 30 year period. The only certainty? Most assumptions will end up wrong. Unfortunately, no one possesses a crystal ball.

So, what’s wrong with these long term forecasts/assumptions? Well, small changes in rates of return will greatly impact your plan. The best we can do is construct a portfolio, and estimate how it will perform based on historical averages. If we predict 8% and achieve 8%, you’re doing great. However, most advisors import all your investments into their forecasting software, and run projections 30 years into the future (including growth rates, dividend yields, tax implications/rates, etc). These complex assumptions will most likely prove to be inaccurate, and your plan is LESS meaningful as a result. More data does NOT make a plan more certain or more accurate.

What do we suggest instead of traditional financial planning?

Does that mean we shouldn’t make ANY assumptions? No. Instead, we make as few assumptions as possible, and focus on what really matters; your goals, spending and savings habits.

Regarding forecasting rates of return, long-term portfolio return, rebalanced annually, is much more meaningful than attempting to predict performance of individual holdings.

Focusing on your savings and its relation to your current lifestyle is more reasonable than attempting to predict actual income and expenses for the next 30 years. Plus, as we said above, forecasting those figures accurately over the long-run is nearly impossible.

Regarding savings, if you cannot budget for a year, or even manage your life to a budget, focus instead on what you CAN save. Review your income THIS year. Compare to what you’re saving/contributing to 401k/IRA. If you don’t know how and/or where you’re spending your money, you’ll have to create a budget. The difference in our method of planning is you weren’t forced to start with a complex budget.

Financial planning is an ongoing process. Plans should be written in pencil… feel free to use your eraser. Create a plan, adjust as needed. We want you to see a range of possibilities, a game plan for financial success. The plan will allow you to make more appropriate financial decisions because you’ll be armed with better information and a road map to your future.

Lastly, but NOT least, keep focus away from short-term noise and market performance. Quarterly and one-year ups and downs are muted over a 30 year period. View short term performance, market volatility and 24/7 financial news in context of your long-term plan.

Plan well and live in abundance.

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