Building a financial plan starts with a solid foundation – it’s true! But, could your financial plan be compromised because you lack the time to take a more comprehensive look? In trying to compensate for your lack of time are you not questioning key assumptions? If so, your plan may be built on faulty facts.
Are you building a financial plan on a foundation faulty?
It is easy to want to talk about your final future goals, values, and passions. It typically isn’t as exciting to talk about issues surrounding debt:
- Is your credit score below 700?
- Is your consumer debt 20% or less of net monthly income?
- Is your housing expense ratio1 aka front-end ratio less than 28%?
- Is your debt ratio2 sometimes called a back-end ratio less than 36%?
It’s often even more uncomfortable to talk about issues surrounding outcomes we don’t want to face like unemployment, disability, aging and end-of-life:
- Do you have 3 to 6 months of monthly expenses sitting in FDIC cash?
- Do you have a plan to cover your expenses in case you are disabled?
- Do you have a plan to pay for health care and long-term care when you retire?
- Do you have life insurance that replaces all your paychecks from now until you retire?
Building a financial plan – assumptions that feel good
During investment, conversations are you and your advisor using assumed rates of return, like getting a 6% return? Fortunately, if one invests in the markets one doesn’t get a chance to dial in a specific 5% rate of return or 8% rate of return for that matter. While it makes for some easy back of the envelope calculations it doesn’t work in the real world of implementation. The 5% rate of return likely sees a range of highs and lows from say -10% to positive 10%.
Moreover, do those returns consider fees? Fees could include the investment advisor, broker, investment manager, trading, custodial, and cost of insurance. These fees can have a detrimental effect if not considered in advance. That may require adjustments in your plan.
Hearing what we want to hear and not what we should
Often, we are susceptible to not questioning promises we want to hear versus the ones that we should hear. I often hear financial professionals who are licensed to sell investments and those who are licensed to advise on investments (there is a difference) boast of how good their investment management skills are. I have learned to doubt their claims. If they were really that good, shouldn’t they be able to run a mutual fund where they would have to openly disclose their results? Bernie Madoff gave people the results they wanted until it was discovered that it was a Ponzi scheme. There were some professionals who had done some analysis who knew that what he was offering was impossible to achieve. Do you have the time to acquire the skill to be as discerning as them?
Target-date strategies without target savings rate
Target-date strategies can give one the impression that they are all set when it comes to investing for their retirement. You just set it and forget it right? If it were that simple why don’t all the target-date portfolio managers all use the same glide path? The glide path is the change in the stock and bond mix of a fund over time. When people are younger the stock exposure is higher and as they age it decreases. Unfortunately, all target-date strategies don’t abide by the same rules. While it may seem that they promise sufficient retirement outcomes in the future they do not.
That leads me to savings. Your company may default your savings rate, say to 3%. If you are fortunate, they might also match that contribution. Neither of those defaults guarantees you that you are saving enough. If you are saving in an IRA or Roth IRA, the government sets maximum contributions which may or may not be enough for you.
Unfortunately, there are no default instructions for saving when building a financial plan. That’s because it depends on many factors including how much income you want during retirement, inflation rate, return rate, volatility of those rates, length of savings, etc. Given so many variables management can’t be set and forget it.
No investment strategy assures success or protects against loss. Investing in mutual funds involves risk, including possible loss of principal. The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.
Assessing “the state of your plan”
To assess where you are at, I developed the 24-question, Envisioneering Structural Assessment. It’s a report card of sorts of overall financial structure. The bullet points earlier are just a few questions that it asks. Don’t you deserve to know where you stand? Once you do, you can determine if we are the right people to help. Will you be the first to score 100%? Contact me today!