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# No Magic Number!

I was math-phobic in primary school. Perhaps that is an embarrassing admission for someone, who now makes her living running numbers. But the reason numbers scared me then was their demand for absolute precision. For instance, 5,632 times 8,765 must equal 49,364,480. For a fifth grader, who has no reference point for visualizing fifty thousand of anything and, who is compelled to find the answer using a number 2 pencil and paper, that is a scary computation. My son goes to a Montessori school, where they have, at least, tactile objects to help them make sense of large numbers. And the reality is, of course, that most of us adults don’t work those things out on paper anymore. Even handier than a pocket-sized, solar-powered calculator is the calculator app that most of us have on our ever-present phones.

Just like no one told me that the pencil and paper method was just temporary until I grasped the concepts, no one told me until I was much older and through my MBA, that many calculations, pertinent to adult life, are not expected to be exact and are liable to change. Take buying or selling a home. You have the price you want and the price you are willing to accept and the actual price you end up paying is usually somewhere in between, even before the addition of commissions and fees and taxes, most of which you won’t know to the decimal point until the closing date. Or take interviewing for a job. Most job listings I’ve seen have “salary commensurate with experience” at the end. But your valuation of your experience may not be the same as the hiring managers. Not to mention the fact that the value of health-insurance, 401(k) match, and other benefits will be unknown to you until way later in the process.

Financial planning, from basic budgeting to the complexities of estate planning, special-needs trust funding, or equity compensation management, is not, therefore about finding a number. I could tell you that you need \$1,798,463.21 to retire. Or that you need \$2,588,325.49 to fund your daughter’s special needs trust, or that you should start exercising your stock options in batches of 50 beginning in the year 2047. But I’d have a 99.999999999999% chance of being wrong in every case. There are a lot of variables that go into each major lifetime calculation. There are variables specific to you too. When will you retire? How much will your health care cost? Will you downsize in the future, and, if so, how much will you save? Will you need long-term care? How long will you live? How long will your daughter with special needs live? What kind of funding will she get? Will it keep pace with rising costs? How much will she earn on her own? Who else will leave her money after you? Will the company stock overweigh your portfolio? How long will you stay with that company and have job security? Will your tax bracket be higher or lower in 2047? This list goes on.

Then, there are the variables general to the larger economy. Will inflation average 2% or 5% or more? Will trade policy affect your company or the stock market and, if so, for how long? Will the Tax Cuts and Jobs Act provisions really sunset? Will there be a whole new set of income or estate tax laws? Will the property market strengthen or weaken? How much will long-term care costs increase? Will Social Security or Medicare really need to cut back benefits? This list goes on too. So if we cannot begin to predict the exact value of any of these variables and therefore cannot calculate “a number” in an answer to any of your financial “how much” questions, then what ARE we doing when we do financial planning?

It’s pretty straightforward. First, we are determining which variables will have the greatest impact on your financial future. For example, if you have a pension and work in an industry that is unionized, then the future of Social Security may be irrelevant, but the amount of salary increase, negotiated with each new contract, is very important. If you will be funding your retirement entirely through 401(k) and IRA contributions, then your employer’s match, your asset allocation, and the performance of the stock market will have a significant impact. If you are a person with a disability or have a child or sibling with one, then that person’s eligibility for benefits and your state’s funding for services and supports are supremely important to the calculation. If you come from a long-lived family and/or one that has a history of physical and/or mental health issues in later life, then long-term-care cost inflation could be key. If you live in a state with high income taxes (such as Illinois) or are likely to face estate taxes, then the tax law changes will be very relevant to the success of the plan.

Second, we determine ways to control the variables as much as possible. For example, we diversify a portfolio and perhaps use a “buckets of money” approach to make sure that the asset allocation for a particular sum of money is the one most likely to generate sufficient returns with acceptable risk over the time horizon, available for the investment. We make sure to take full advantage tax differentials and determine what is the mix of taxable, tax-deferred and tax-free investments likely to generate the lowest tax bill over a lifetime. We look at the timing of assets withdrawals or sales to minimize tax impact. We use various kinds of insurance to mitigate the risk of premature death, disability or high long-term care costs. We understand the rules of Social Security and pensions, so that we can maximize these income streams for the entire family. We use trusts, titling and beneficiary designations to reduce the costs of transferring assets.

Third, we run “what if” scenarios to see how you could change tactics to meet unanticipated changes in variables. If someone lost a job unexpectedly, would that person have enough in emergency reserves to do some additional training? If the industry in which one spouse works is not strong enough to last long, could the other spouse return to work or increase her or his hours? If the stock market takes a downturn just before your planned retirement date, could you work at least a few more years and downsize into a smaller house? If tuition increases astronomically for a top-notch school, could your child do two years at a community college or the state university and then transfer with credits? If there is no group home that you like available for your child with a disability, could you use a combination of her/his work income, Social Security, home-based support funds, and a Section 8 voucher to set her/him up in an apartment with a friend and intermittent staff for support?

All of the aforementioned is basically what we do as financial planners. Some people delay financial planning because, like fifth grade me, they are afraid there is only one answer to their financial equation and they may not be getting it right, or they may fear that their financial goals are way too difficult to attain and be told so by a professional in the field. Yet, the reality is that in doing the planning, you are not only seeking the answers, but are also actually setting up the equations to solve. The more you understand how the equations work, the closer you will get not to some magical mystery “number”, but to a clear and comfortable preview of your financial future.