Good financial planning isn’t about forecasts or projections. It’s about managing one’s finances amid uncertainty.
Sure, we go through times where we can feel more certain or less certain, but the normal state of affairs is that the future is uncertain regarding some aspect of our finances and our lives. It has always been that way, and I believe it reasonable to assume it always will be.
I’m guessing that any financial planner with more than a few years of experience has had a retired client say something like “I can’t afford to lose money because I don’t have time to recover.” Given the behavior of the markets, you may have heard it recently.
It is a statement that warrants some exploration. At the very least, “I don’t have time” conveys some anxiety. That anxiety is usually driven most by market behavior, but it sometimes stems from, or is exacerbated by, a mortality issue.
I do not lose sleep over whether markets will recover. Our clients are properly and well diversified given their goals, and as long as they stick with their plans, the odds of getting a good result are quite high.
I have had a restless night or two over the years worrying about whether a particular client would in fact stick with their plan.
There is always someone screaming “This time is different” and suggesting an abandonment of the tenets of prudent investing, and the lower the market goes, the louder and more pervasive the screaming seems to be.
Will they take their well thought out life goals and toss them aside just so they feel more confident they won’t see a lower number on an upcoming account statement? Will they shrink their time frame that dramatically?
We know that such a dramatic shift is usually damaging but it does beg the question, how much time does a client really have? How much time do any of us have?
The answer is unknowable, of course. The proverbial bus may be just around the next corner for all we know. Some clients are confident that their time frame is short due to illness. For most clients, we can only make educated choices regarding life spans.
The easiest starting point to make an estimation is a mortality table. Back in 1980, the Social Security Administration estimated that the average 65 year-old male in the United States would live another 14 years. Today, they say a 65 year-old man is expected to live 18 years to age 83.
These are just averages. On average, do you plan to the average? I doubt it and hope not. Few clients will be average.
The practical issue is whether to plan for an above or below average life expectancy for a particular client.
Personal habits definitely impact life expectancy. Bad diets, obesity, poor general fitness levels, hazardous work or hobbies, stress, family history and chronic diseases among other factors should be considered, of course. However, I think we all know of exceptions.
A couple of years before she passed away at 94, I asked one of my clients why she thought she was in such good health. Her reply: “Since I was 16, I eat bacon every morning and drink some whiskey every evening.” She was dead serious.