Self Inflicted Pain

Financial Planning has come a long way since Suze Orman burst on the scene with the revolutionary financial philosophy that you should spend less than you make and the difference,….drum roll please…. you should save.

How awesome was that advice? We can laugh at the simplicity of Suze’s proclamation but sometimes less is more. Besides, it made Suze a very wealthy lady.
Unfortunately Financial Planning has gravitated to a series of charts, products, ideas and even words that are unintelligible to not only the planee but the planner.
You know the drill, but let’s walk through it any way.

You and your significant other sit at the planner’s desk. The usual comment go something like this: “Planning for the future is a choppy sea but I’m just the Captain to navigate you through it.”(I feel good, how about you? Try not to get seasick!)

Then it’s on to basics like how much do you spend annually? When do you want to retire? Any lifestyle changes anticipated? What do make and what do you have?
Then a series of calculations are run through the computer after having inserted a life expectancy and of course the ever present inflation rate assumption. So far so good. The Captain seems to be really navigating.

Then comes the biggy. The computer, after crunching all the numbers, spits out the average annual rate of return that I MUST achieve to sail into port (remember this is seafaring).
In the old days the planner might say “No problem” or “going to be close” or even “forget about it.” Given that many, though the number is shrinking, just want to maintain their lifestyle, the planner said “No problem, I’m your Captain,” (I still feel good)

Usually as we get older, and hopefully wiser, and have experienced financial shocks of the past such as dot com, housing meltdown or the crisis of 08 we tend to get more protective of our assets. That means a higher degree of fixed income and cash. Unfortunately, given the Fed’s desire to keep interest rates at… next to nothing, a large percentage of the Plannee’s portfolio had been earning… next to nothing. Therein is where the conflict arises, that dreaded average rate of return that MUST be made in order to not sink the ship but come safely into port. The safer one gets the further the goal. What to do? Ah ha! The Captain.

The plannee anticipated the suggestion of more risk, because after all with more risk comes more reward and we HAVE to hit that number. In this instance, assured by the Captain, a very conservative 7%.

Okay the Plannee was prepared to hear about quality companies with good management, great shelf space, free cash flow and terrific upside potential selling at bargain basement prices. Kinda like Warren Buffett. But alas the Captain, Planner, rolled out a series of charts highlighting leverage, volatility, ETF’s, valuations, correlations, and several others that simply became a blur.
Seeing the glaze in the Plannee’s eyes, the Captain assured them that “this is the way the major pension’s plan for the future. So why not you?” Of course the Captain failed to mention that almost all pension plans are underfunded, never hit that magical MUST number and are about ready to implode. But what the hey.

I could also mention that the Captain failed to mention that there was only one life preserver on board and it only fit him.

I could go on with this soliloquy but I think you get the message.

What you have at the end is what you have. At that point your lifestyle will be determined. Having to hit a MUST number is a sure formula for driving you to do things you shouldn’t, in things you have no clue about creating the worst of self-inflicted pain.

My old colleague at Pru-Bache was right. In the end don’t spend any more than you have coming in and if there’s some extra, tuck it away where you know where it is both now and in the future. That’s real planning.

Now why didn’t I write that book?

Written by
With his passion for economics, Bill Tatro has been entertaining audiences on the radio and in seminars for over 30 years. Bill’s dynamic and no nonsense style has made him one of his stations’ most popular show hosts.