5 Things That Actually Matter To Your Financial Plan

Sam Swift, CFA, CFP®, AIF®

Jun 5, 2020

In all my years of following financial media (by the way, that task ranks right near “wearing a tie” on my least favorite part of the job), I’ve noticed that the fast pace and endless amount of available data pushes us towards asking all the wrong questions. Especially now, the “squawk box world” seems to be focused on the following:

  • What does the daily news mean for your investments?
  • Is COVID-19 going to have a second wave?
  • How do I protect against another downturn?
  • When do I sell?
  • When do I get back in?

These questions have one thing in common: they are irrelevant to your lifetime financial plan. Not only are they reactive as opposed to proactive, but they focus squarely on the present instead of the future. They also assume we know perfectly well what the future holds . A well-designed investment plan knows there will be bumps and obstacles along the way but is robust enough to get through them. So, what questions should we be asking ourselves?

Getting to our Destination

Permit me an analogy that almost seems nostalgic in the age of COVID—flying an airplane!

Before any day at an airport, controllers spend a great deal of time planning routes down to the minute. Pilots go through a massive checklist to make sure all is in order. Maintenance gives a thorough inspection. All is set for a perfect flight. And then the plane takes off and all kinds of unknown variables get thrown at the pilot.

Let’s say our hypothetical plane is going from Los Angeles to New York. What happens when the wind shear is a few knots greater than anticipated? It doesn’t matter how much precise planning we’ve done prior to taking off if we don’t plan for how we will adjust when we’re inevitably thrown off course. Without intervention, a gust outside of Burbank could put us in Miami.

Obviously, most of the planning that goes into any flight has to do with anticipating the need to make adjustments. What will we do when a bad storm forms over Oklahoma? What happens when some turbulence forces us to a lower altitude over Indiana? The pilots know which buttons to push and which levers to pull to ensure they remain on track for their destination. It doesn’t always mean they’ll get there exactly as planned, and in extreme cases they may even have to change the destination, but they know what they will do in any situation before it arises.

In this analogy, the markets are our jet stream. They propel us towards our destination in normal times, but are also subject to turbulence and variations we can’t anticipate. These are the relevant questions we should be asking ourselves now so we know what to do with future turbulence: What are my levers? What can I control to make sure I stay on my flight path?

1. Savings

For those of us still working, this may be the most important lever. How much you put in (and how long those savings have to work) are extremely important. When the market hits its bumps or slows its march for a significant amount of time, we can pull the savings lever to get us back on track. Being in a position to capitalize after a market pull back is not easy, but if you plan properly it can be a powerful tool in your arsenal.

2. Retirement Date

I generically use retirement date here, but I prefer to call this the “point of financial independence”. This is the point in your life when you no longer need a paycheck and can live off of the assets you have accumulated. Whether you choose to work at this point is no longer being driven by financial need. It’s a powerful lever. One more year of work, after all, means one more year of saving and one less year of our next lever.

3. Spending

For those of you reading this who are already retired or close to it, this is definitely going to be your most impactful lever. The lifestyle you want to live is the determinant for how much you need to save and when you can retire. Of course, for those of us that have significant discretionary spending, this is also a lever we can choose to pull during rough market times. Perhaps we won’t take that big trip this year or we’ll hold off on the kitchen remodel.

4. Risk Level

We have a choice over how much risk we choose to take in our long-term investments. We can all be in a portfolio that has no volatility if we chose: our bank account! Unfortunately, we don’t get rewarded very well in long-term returns for that. The best way to get from LA to New York is to take a flight, but that comes with risk. We may hate turbulence or the TSA, or the flight could get delayed on the tarmac (ugh, the worst type of delay). Alternatively, I could choose to take a train or drive (let’s leave aside that flying is much safer than driving, statistically—the point here is the emotional fear of flying). It will either take me longer to get there or I will decide that Las Vegas, not New York City, is good for my end destination. But I do have a choice.

5. Legacy

Do you want anything to pass on to the next generation or to charity? And how much are you willing to pull on the other levers to make sure you are able to do so?

Which levers should I pull?

Hopefully, you have begun to get a sense of how these all work together. Each person will have their own unique configuration based on what’s most important in their lives and analyze the tradeoffs. The person who doesn’t like market risk may happily choose to save more or retire later. The person who can’t see themselves ever retiring may spend a lot or plan on giving most of it away to their kids and community.

Another note on these levers is that they are rarely permanent adjustments. The financial crisis of 2008-2009 was a period where many of my clients had to use their levers. Maybe they reduced spending, pushed out their retirement date in their minds, or increased savings (of course, the number one change was to reduce the inheritance for their kids…and often without hesitation). In any case, the change was smaller than expected (reducing $10,000 per month in spending to $9,000, for example) and didn’t last long. By making the adjustment and staying invested through the inevitable recovery, we had returned to the pre-crisis baseline for most within a year and were able to actually push the levers in the opposite direction soon after that (i.e. spending more or retiring earlier than we had planned pre-crisis).

And that’s an important point to remember. Given the current situation, I’ve focused on what we do when markets perform worse than we would expect, but it’s equally likely they can outperform our expectations and it’s then we find ourselves making the fun adjustments—retire earlier, spend more, leave more to charity, etc. I have to say I’m struggling to match the good parts to the flight analogy, though…It’s probably a fast jet stream and I think it means we could just get to New York City an hour early, or better yet, we choose to fly right on past New York City and do some sightseeing in Iceland!

Even the best assumptions about the future will be wrong in some unknowable way. There will be some variance. The art of great planning is in knowing what you can control and how you can make adjustments when things outside your power behave differently than expected. If the last three months aren’t evidence of that, I’m not sure what is.

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