Financial planning is often more about what we don’t know than what we think we know.
Jim Lorenzen, CFP®, AIF®
Often financial planning and wealth management is more about the unknowns in life than the knowns.
After years of supporting roles on the Flintstones, Barney and Betty decided to retire from acting in cartoons (it’s hard to be a cartoon character!) and enjoy life. Using a 4% withdrawal rate, they planned to take $40,000 a year from their $1 million retirement account which, with their Social Security, would provide them with everything they needed for life. Growth of investments would give them their inflation hedge.
“Security is mostly a superstition: it doesn’t exist in nature” – Helen Keller
They retired in 1999. Unfortunately, after three years his inflation-adjusted withdrawals and the market’s poor performance had eroded his portfolio to less than $540,000. At this point, his withdrawals now represented almost 8% of his portfolio value. Bad problem. Inflation made those withdrawals necessary but the 8% withdrawal rate simply wasn’t sustainable.
The market was good to him for the next five years; but, by the end of 2007, their portfolio was still less than $670,000, meaning withdrawals still amounted to more than 7% of portfolio value.
Then came 2008-9 – the melt-down. Their nest-egg plummeted to less than $400,000 and withdrawals now represented more than 12% of account value (cost of living still going up!)
4% didn’t work too well for Barney and Betty. Fred and Wilma (actually, more Wilma that Fred) had told them they needed a real plan that would be stress-tested for all the unknowns in life.
Planning isn’t about what we know; sometimes it’s knowing what we don’t know – and recognizing that often there are things we don’t know we don’t know. It’s more about managing risk than money; and planning for the unknowns.
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
Opinions expressed are those of the author. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.