Financial life is full of questions. Sometimes the answers to these questions are different from what is expected. Here’s a sample of common questions with perhaps uncommon answers.
- Are you saving enough? The answer to this of course depends on what specifically you are trying to accomplish. In the grand majority of cases (maybe 80%+), folks that come here are not saving enough. Building wealth isn’t directly connected to your income or even your investment returns. The most important factor is how much you save. Period.
- Do you really need to save if you don’t plan to fully retire? We are seeing this question more these days. Lots to unwrap here. The operative word in the question might be plan. While many folks are capable of working well into their 70’s or even longer, some are not due to physical or mental constraints. Moreover, with corporate shake-ups occurring with greater frequency, your job may go away even if you planned to continue working. No, planning to never retire doesn’t mean you should forego saving. Saving provides critical flexibility for your future.
- Our friends are always talking about their investments. How are our investments performing? Simply put, investment returns matter but not nearly as much as most people think. Our philosophy is to build a simple, low cost, globally diversified portfolio that doesn’t try to out-guess the market. This way, your portfolio accrues whatever returns these distinct market segments provide. The rub is this means some components will perform differently than others, particularly in short-term timeframes. However, since we are focused on funding long-term goals, short-term performance is of little concern. Extend your investing timeframe to increase your returns.
- Should you attempt to optimize and maximize your returns? Human investors are neither rational nor reasonable. The whole idea of ordering your portfolio to maximize returns is a spreadsheet fantasy. It might work on the computer but insert human emotions into the mix and a whole different set of issues appear. As I say in the last part of number 3 above, you need to stay in the game in order to receive the long-term returns. Trying to maximize returns generally pushes the envelope to the edge and makes endurance difficult.
- Can you structure your financial plan so that you’ll never be surprised? The future is by definition unknown. Things will happen in the future that have never happened before. There will be surprises. While history provides guidance, the planning process builds in a margin of error. You need to be willing to adjust to new realities.
- What is the annual percentage that you can safely withdraw from your portfolio in retirement? Everyone has heard of the 4% withdrawal rule and that is a simple, albeit outdated, place to start. Retirement, however, is not a “set it and forget it” stage of life. Actual spending rates and portfolio allocations should be adjusted annually to reflect current reality.
- What is the single most important attribute needed to build and sustain a successful financial life? We’re hearing this one more and more. Because of the pervasiveness of negativity within the broad media, it is increasingly difficult to maintain optimism. Yet, throughout every stretch of history, optimism is the only reality.
Our financial planning process is focused on reality, not precision. You can’t engineer the future to unfold exactly as you desire. Avoid investments and other financial products that promise certainty. This is a false promise and provides false security. The future has no boundaries. Nobody can predict what will happen next.
Save for tomorrow even if you can’t know what tomorrow will look like. Stay optimistic and focused on what matters most to you.
Related: Your Financial Life Is an Endurance Race, Not a Sprint