How Much Money Do You Need in the Future?

by Kyle J Christensen, CFP, Founder & President of Personal Financial Snapshot

That's the question people are being trained to ask by many in the financial services industry. If you've read anything I have written previously you probably know what I'm going to say about this. WE CANNOT PREDICT THE FUTURE. We (you, I, and anyone else) can't predict rates of return on investments (or even future rates in bank accounts for that matter). We can't predict when recessions are going to happen. We can't predict what inflation will be. We cannot predict whether or not someone is going to get sick, injured, lose their job, change their career, move to another location, and on and on and on. We cannot predict the future.  

Now, I want to tie this in to the Personal Financial Snapshot software, and how our planning is different than the norm. If we can't predict the future, why are people in our industry telling people how much money they need to have in the future in order to retire? Whatever answer they give you is an absolute falsehood. In other words, that number they give you is 1) not going to happen (it will be more or less than what is stated), and 2) isn't the right number. I can say that with 100% confidence because know that they do not know, nor does their computer software know, what the future holds. If they could predict the future, they wouldn't be talking with you, because they would be so insanely rich that they wouldn't have time to talk with you. I'm not saying advisors who do this are bad people trying to purposely deceive you. They do it that way because they are trained to do it that way. Their training on this is so ingrained in their minds that they can't imagine doing financial planning without it. In fact, any type of financial planning that doesn't include predicting future retirement needs, future expenses, and so on, cannot be comprehensive planning in their minds.

We have a different approach with Personal Financial Snapshot. If you have a business management background and education, you are going to relate to what I'm about to say. Successful businesses do not create twenty or thirty year plans and forecasts of the future. Why don't they? Because they can't predict the future, and their focus is more about efficiency, taking advantage of opportunities now, and acting on making improvements today that will impact this year and next year. They realize the world changes too quickly to try to predict those things very far into the future. It's an effort in futility to try to make plans into the distant future especially with any specificity. So, because businesses don't make decades-long plans into the future does that mean they aren't comprehensive? Does it mean they aren't trying to reach goals? Absolutely not. It just means that they aren't going to waste time working towards false predictions of the future.

Why does the personal financial planning industry try to do that then? Think about this. If you owned a bank, what would you like me to do with my money? You would want me to put it into your bank. How often would you like me to add money to the account? Every time I get paid. How long would you like me to leave it there? Most likely you would say in all honesty, "forever". So, you, being a honest good person, would actually try to get me to leave my money in your bank forever? You wouldn't want me to use my money (because that would mean I would be pulling it out of the account, which is against your best interest). So, as an industry, if we can convince people that they/we can, in fact predict the future, and that they can "compound" their way to that number and retire, with little to no additional effort, have we not achieved the objective that all financial institutions have? Isn't it true that most asset managers do not want you to pull your funds out to use for anything? Isn't it true that anytime the market goes up or down, it's never really time to sell? In other words, haven't asset managers and financial institutions done a great job of convincing people that they should give up control and access to their money for decades into the future? And, isn't all of that based on the idea that somehow financial advisors can predict the future?

The other falsehood that many asset managers base their planning on is that Wall Street is essentially the only game in town, that there are really no other ways to "save for retirement". I'll leave the purposeful confusion of "saving" and "investing" to another article. But here's the truth. Most millionaires in America did not create their wealth in the stock market (read The Millionaire Mind, by Thomas Stanley). In fact, according to Thomas Stanley, who did a twenty five year research study on the topic interviewing thousands of millionaires, only about 12% made their wealth in the stock market. Out of those, I would be curious to know how many of them work on Wall Street or are connected somehow to it. The book doesn't answer that question. So, if 88% of millionaires create their wealth in some other way than Wall Street, how are they doing it? The problem is, you aren't going to see many articles about this because Wall Street and the Securities Industry doesn't want to promote anything but what they sell and can make money on. Again, think of what financial institutions really want us to do.

Predicting (no matter how sophisticated it may be) the future and giving people a number goal for their retirement is simply a sales tactic. Does it work? Yes, from the sense of convincing people to save and invest money. This is why financial institutions use it. Is it correct? No. Are those numbers accurate? No. Especially the further out those predictions go.

The philosophy behind Personal Financial Snapshot is that our focus should be on maintaining control of our money throughout our lifetimes (which is one of the top factors that Thomas Stanley discovered in his research), and get as many uses of our money as possible. In fact, that is what financial institutions do with our money. They themselves do not create long-term financial plans for their businesses. Their focus, just like ours should be, is efficiency and effectiveness. Their planning is based on principles, not predictions.

Personal Financial Snapshot is the only software that I know of that does not try to predict the future related to protection or retirement/investing. The goal is maximum in both areas. How much income do you want in the future? The most you can get. How much protection do you want if the event you are protecting against actually happens? The most you can get. If the focus of your planning is efficiency, effectiveness, and principles-based, you will be in the best possible position you could be in in the future. Will it be enough? Who knows? You will only know when you get there. But you will know you did the best you could. That's what planning should be about, doing the best we can. In fact, the CFP Board has recently changed their definition of financial planning. It used to say, "'Personal financial planning' or 'financial planning' denotes the process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial planning integrates the financial planning process with the financial planning subject areas". The new definition, which is going to be implemented Oct. 1, 2019, states "Financial Planning is a collaborative process that helps maximize a Client's potential for meeting life goals through Financial Advice that integrates relevant elements of the Client's personal and financial circumstances". I love the new definition because it eliminates the false idea that we can "determine" whether or not an individual can meet life goals. We can't determine (predict) it! Instead, what is the new focus? Maximization of the client's potential. Anytime we talk about maximization, we are talking about efficiency. That should be a planner's focus. John Bogle, founder of Vanguard, realized this as well. Why is Vanguard so popular? Because their focus is efficiency! In particular, their focus is lowering the costs of investing in mutual funds. John Bogle's research revealed some important truths about the financial service industry's ability to predict the future. He found that they can't, at least not consistently. This is why Mr. Bogle recommends people invest in passively managed index funds, if they are going to invest in the market. Because paying an asset manager a bunch of fees to "beat the market" is pretty much an impossible task over time, according to John Bogle's research. Watch: The Retirement Gamble (a PBS Frontline documentary).

When choosing which type of financial planning you should do, I encourage you to consider Principles-based Planning instead of Predictions-based Planning. Your clients will thank you.