The Uncertainties of Life and How to Address Them | Financial Planning

The Uncertainties of Life and How to Address Them

I’m always interested in learning what’s on people’s minds, and especially those of our clients.  An advisor’s craft is all about bringing some clarity to an often confusing and uncertain world. When I speak with or meet people, I’m always asking questions about what’s on their minds, how is their business doing or, perhaps more to the point, what keeps them up at night.

As I wrote in my last newsletter article, “Pandemic of Uncertainty,” people seem to feel that they are beset by a widespread sense of uncertainty, caused in part by an unclear political and economic situation.

The Difference Between Knowledge and Wisdom

In planning for the future, one of the key things an advisor brings to the table for his clients is a sense of perspective. Central to that mission is differentiating between what’s important and what’s not important. This requires a blend of knowledge and wisdom, which are related but different. Knowledge, for instance, is knowing that technically a tomato is classified as a fruit; wisdom is knowing not to use a tomato in the fruit salad.

While knowledge accrues from learning, wisdom is derived from experience. Or, to put it another way, wisdom is the constructive application of knowledge. In part, wisdom may derive from experiencing failure, which can provide some of life’s most indelible insights. That experience is what the successful advisor adds to the mix in working to identify the critical variables in the equation that can lead to long-term financial security. That includes estimating the value of a host of economic, financial and psychological metrics, including inflation, a client’s retirement tax bracket and tolerance for risk, to name just a few.

Forecasting With Uncertainty

A typical financial plan has about 30 variables. That may seem like a lot, but it’s actually works out to be advantageous.  Experienced advisors know this because we have the luxury of being able to review plans written 10, 15, even 30 years ago. From this record we know that, most of the time, our projections for many of these variables will be a bit off (occasionally, more than a bit). But the goal is to always try and reduce the margin of error for each variable. That’s where wisdom and experience come into play. The experienced advisor knows that of those 30 variables, some will be above and some will be below our best educated guess. In that sense, the estimates of these variables will tend to balance one another out and reduce the overall margin of error in the forecast for the entire plan.

For example, back in 1986, we may have used as our baseline a 4% rate of inflation, derived from an average spanning 50 years, and a 7% rate of return on a balanced portfolio, based on historical rates of return and a client’s risk parameters. Today the inflation rate is closer to 1%, which alleviates the performance burden on the portfolio by requiring perhaps only a 3% to 4% rate of return to meet asset accumulation targets. So while these numbers are currently below their long-term norms, the client’s plan is nonetheless currently working because the current “values” of these variables are still complementary.

Planning for Uncertainty

What about those non-numeric variables, those big unknowns that can affect our lives?

As many of you know, my wife Rosanne is a pioneer in the area of financial geriatrics. Many years ago, Roe was among the first to alert our clients that their parents were living longer and that we needed to adjust plans accordingly. In addition, Roe was early to identify the new socio-financial wrinkles our clients (both younger and elderly) were beginning to experience, such as adult children moving back in with parents and (in some cases) bringing along grandchildren in the wake of a divorce, or a 50-year-old son moving back in with his 80-year-old mother after losing his job.  Many clients are now supporting their children with supplemental income because of job losses or insufficient income. So how does one go about planning for these uncertainties?

The Extra Cushion

We know that the big question that paralyzes people when it comes to planning is. How can I plan for my future, given all of these planning variables and the unpredictability of life?

After wrestling with this question for many years, I believe I have a reasonable answer. Instead of planning to be 100% funded in retirement (in effect, be financially independent) to age 100, we now recommend that clients be funded 115% to 120% to age 100.

This extra 15% or 20% cushion is meant to anticipate the X-factor of life’s unknowns. Should you experience, say, what we call Boomerang Kids (adult children asking to move back in with you), you can write a check to help them continue to live on their own. Should you need to supplement your health plan, you can easily accommodate the added expense without jeopardizing your financial security. And, should you live beyond age 100, the cushion will help you celebrate that happy milestone with nary a concern.

But building that cushion requires that all of us to give up something today in exchange for that added security tomorrow. And what if none of these unknowns comes to pass?  Well, then, the beneficiaries of your estate will be very happy that you lived a happy, healthy and uneventful (no X-factors) life. They will also appreciate your generosity and know that the assets you leave them will help them build that extra cushion in their own life’s plan.

Keep in mind that all plans are dynamic and need to be monitored. Any major change in lifestyle, retirement, marriage, death, divorce, etc. should trigger a call to us followed by a plan update.

Share What’s On Your Mind

As we continue to learn and build our knowledge base, you can help us by sharing what’s on your mind. What do you worry about? What keeps you up at night? How’s your business? How’s your health? What’s keeping you from moving forward?

Your responses will help us formulate better responses as we move forward in this challenging environment and may well help us write future articles addressing these issues. I have found that when a few clients ask a question there are dozens more out there that have the same question on their minds, but just never asked.  Please feel free to share your concerns; it helps us do a better job for you. Send your “what’s-on-my-mind” topics to me at

I would like to leave you with a two Mark Twain quotes that I believe are as relevant today as they were when he wrote them:

“I’ve been through a lot of terrible things in my life. Some of them actually happened”

“Twenty years from now you will be more disappointed by the things you did not do than by the ones you did do.”

Letting your future just happen without a plan is a choice, but it’s a choice that will be perilously lacking both knowledge and wisdom.

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