FAMILY UPDATE!
As I've mentioned in the past, once temperatures drop below fifty degrees, orchids get finicky. We can't carry 250 orchids in and out every few days, so we decided to build a greenhouse. It's not a traditional greenhouse. We just hung heavy plastic over the extended lanai, creating a decent-sized space to cram all the orchids. I put a space heater in there, and it seems to work ok. Once it gets colder, we need to figure out how to heat it better.
Also, sad news. I took the puppy to the groomer and asked them to just cut around the eyes and keep her looking like a puppy. I was very clear in my instructions. When I went to pick her up, I could tell the groomers seemed nervous. What is going on, I thought. Then they brought Penny out. You can see the aftermath above in the before and after pictures. I think someone didn't get the memo.
Samantha and Charlie needed help. As they neared retirement, they realized it was time to create a financial plan.
It seemed like there was a bevy of choices to choose from. There were financial advisors everywhere. They didn’t feel it appropriate to ask around the neighborhood. “People’s finances should be private,” Samatha always said. “That stuff is nobody’s business but their own.” (I can't entirely agree with this thinking. I think the best way to find an advisor is through people you trust. You do it for mechanics and CPAs. Your friends will be happy to help.)
So they decided to walk into a large bank with branches nationwide. As they entered the lobby, they marveled at the marble columns and windows with skyline views. The waiting room was gorgeous. Leather sofas and other high-end furnishings left an imprint on Samatha and Charlie.
After a few minutes, they were ushered into a conference room with a financial advisor, Joe.
“Let’s start with your financial information,” Joe said.
Samantha and Charlie poured out their financial hearts.
Samanta lamented, “We feel so stupid. We know we need to understand this more. We just never got around to educating ourselves.”
“Don’t worry,” replied Joe. “Most people feel the same way. You are in the right place.”
After about an hour, Joe set up another appointment to reveal Samantha and Charlie’s financial plan. A week later, they found themselves back in the conference room.
“I’ve done quite a bit of work on this,” Joe said. “Let’s take a look.”
He slammed down a binder about an inch thick onto the table. He began going through the details. Page after page, he pointed at colorful graphs and charts.
“As you can see,” Joe said. “With your current financial positions and assets, there is an 80% chance you have enough money to last into your eighties. It is closer to 70% if you live into your nineties.”
Samanta shot a look at Charlie. She was clearly upset.
After signing over the money, the ride home was somber. Samatha was just sick.
“I knew it. I’ve always told you we didn’t save enough. We have longevity in our families. You saw that plan. I am not comfortable with a 70% chance. I am not ok with those odds. But it was so thorough, and Joe seemed so smart. From now on, we won’t spend any money unless we absolutely have to,” Samantha said.
“Honestly, I didn’t understand a word he said,” Charlie admitted. “Let’s study that plan tonight after dinner.”
As they flipped through the plan pages that night, Charlie said, “I can’t make heads or tails of this. There are sixty-five pages to this thing.”
So Samantha and Joe spend their remaining years living like they were broke, eating Dinty Moore stew from a can and only shopping at the Dollar Store. They only dipped into their retirement accounts in emergencies. They died with far more money than ever.
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Tens of thousands of people are going through similar experiences right now. It doesn’t have to be this way. You can have much more certainty of your future.
Let’s look at all the assumptions most planning software makes. These assumptions should reveal how useless and inaccurate most of these plans are.
Assumption #1
More pages to the plan mean a better plan.
Probably ten times or more during my career, I’ve been trained in various financial planning software. The more I learn, the less I like them. Complexity doesn’t necessarily mean it’s better. I’m at a point now where my financial plans consist of two pages. It works incredibly well and is as accurate (if not more accurate) than these massive binders.
As an added bonus to my plans, you will actually understand it! If you don't understand it, you will be stressed, guaranteed.
Assumption #2
Inflation will run at 3% on average over any meaningful time period. Inflation is obviously a hot topic right now (it has already dropped dramatically back to 3.24%), but let’s take a look at why inflation doesn’t hurt as much as you think over the long term.
Most software doesn’t take a crucial variable into their calculations. People spend less money as they get older. You buy fewer cars. Mortgages start getting paid off. You buy fewer clothes. You go out to dinner less. When you are eighty-five, you will have a very limited interest in traveling to the Far East.
The Center for Retirement Research found that average spending by households headed by 55 to 64-year-olds was $65,000 in 2017. It dropped to $55,000 between the ages of 65 and 74, at which point it fell to $42,000.
Another important assumption these programs miss is Social Security increases by the inflation rate. This year, everyone got an 8.7% raise to their check due to high inflation in 2022.
So, this single missed assumption completely throws off the rest of the numbers. When this software has one incorrect variable, every other conclusion is wrong.
Assumption #3
The stock market will not necessarily perform as it has in the past.
The stock market has returned around 10% over any meaningful time period. So, if the stock market doesn’t return about 10% between now and the end of your life, it would be absolutely unprecedented.
If the financial planning software assumes the stock market will have an average return of 5%, every conclusion is wrong. The rest of the colorful charts and graphs are worthless. The majority of plans assume much lower returns than in the past. Which, in my opinion, is stupid.
Assumption #4
Life expectancy. This concept that your assets will continually draw down is incorrect. These programs are missing a considerable variable. If you only take out the money that the money is making, you will never run out.
With my clients, I send 5% of their account value each year. If you take out the 5%, it doesn’t matter how long you live. You still have the principal. If you die with less than what you started, it would be historically unprecedented (or at least it's been confirmed for the past ninety years).
I can’t emphasize this enough. If you don’t understand your plan, you will worry unnecessarily. Don’t complicate this; live your life based on a simple plan with accurate assumptions.
Be Blessed,
Dave