By Brad Thomason, CPA
Do you remember the Six Million Dollar Man? Even though I was a kid at the time, it was not lost on me that such a sum was supposed to be essentially incomprehensible by a normal human. Later, when I was in high school, I have a vague recollection of someone associated with the military (a recruiter, I guess) pointing out, in the afterglow of Topgun, that six million is about what the US government had to invest to get a fighter pilot all the way trained. I think he told us that because he was trying to impress us. I don’t specifically recall; but I bet it worked.
Well, times change, and amounts which once seemed titanic have a way of becoming more mundane. Six million dollars is still many, many more dollars than I would want to fork over for a barbeque sandwich. Even with the sides. But it is no longer a number so big that one simply can’t wrap the old head around it. You may not have six million dollars. But the mere idea of it doesn’t utterly boggle the mind the way it did when Lee Majors was jumping around with that springing sound in the background.
I was thinking about all of that because the other day I was doing some modeling for a client, and it turned out that over the period of time we were looking at, the investment portfolio was going to need to generate about six million for the plan to work.
Now, before you start thinking that this guy must be super-rich and has a massive annual budget to go with it, I’ll go ahead and tell you, he isn’t and he doesn’t. I can’t give you any personal details, of course. But his request was more in the form of “what would it take?” rather than “what should I do with my actual savings?”
So since it was a hypothetical in the first place, I can give you the broad strokes.
There were two basic questions. The first, if a 55 year old needed an income of $120K a year (today’s dollars), what would that look like by age 70 if inflation were three percent every year? Second, assuming some Social Security, and investment performance of 7% pre-retirement and 4% post-retirement, how much starting capital (i.e. at 55) would it take to fund that scenario all the way to age one hundred?
So we grossed up the income, entered the other assumptions, and regressed the matter back to the conclusion that the balance at age 55 would need to be about $1.5 million.
That’s sort of a simplistic way to look at the matter, and if we had been trying to do more than satisfy a curiosity, we would have used additional methods, looked for corroboration and generally sought to fine tune where we could. But for this assignment, the basic route was enough to provide the necessary approximation.
While looking at the year-by-year results, we also took a look at the total investment earnings over the period. Over six million dollars, as I mentioned earlier.
Let me state that a different way: the whole exercise was going to cost just shy of $9.5 million. Being alive for decades ain’t cheap, even if you aren’t being extravagant. Of that total, the initial capital amount plus all of the Social Security was going to take out about $3 million of the total. So the investments were going to have to earn the rest.
The reason I’m pointing this out is because it is very easy to think of investment returns as just some percentage number you drop into a spreadsheet that serves to make the totals end up where you want them.
But investment returns represent actual dollars that have to be made, one way or the other.
Are you thinking of retirement in terms of “what do I need to be doing to earn six million dollars?”
In some respects the whole reason you want investments is because you don’t have to do anything for them to make money. But that, too, is just a touch simplistic for the real world. You might not have to toil in the field to make the dividend or interest payment spring into being. But you do have to be diligent about keeping the capital deployed, and thoughtful about where you put it, so that the risks inherent to the particular investment don’t lead to more exposure than your situation can reasonably abide. Investment capital represents productive capacity, but it is up to you to steer it to the places where the production can occur.
So yea, what’s your plan to make six million dollars (or whatever your number is)? I think that is a pretty good thing to think about, man.
By Brad Thomason, CPA
I think that in the modern world, among thoughtful persons, the notions ‘money isn’t everything’ and ‘you can’t buy happiness’ are accepted as truisms.
At the same time I think it is brutally true that if a person is having money troubles the odds are very high that it will spill over into other areas of life and make it much harder to realize much sustained/uninterrupted joy.
So that’s sort of a paradox.
Here’s another. Most people think nothing at all of spending forty or fifty hours a week for forty years to be able to pay the bills that come rolling in every month. Yet they balk at the idea of having to spend extra time setting the stage to be able to do nothing once they retire. It’s as if the simple passage of years is supposed to magically take care of all of their needs for two or three decades (or more) after they decide to hang up their spurs. Or perhaps, they put in their forty at the office, so it isn’t right that they should be asked to put in any more time/effort/thought as payment for some far-distant future benefit.
That has always seemed like a mismatch to me, too.
Well, we live in a world of paradoxes, and being upset by their mere presence or investing great efforts to attempt to resolve the unresolvable isn’t going to be anyone’s first, best use of time.
But I will tell you this. I’ve noticed that most of the people who end up doing well financially in retirement get there via one of three paths:
1. Those who accepted a lower salary during their working years in exchange for old-style retirement benefits. Folks like school teachers, government workers, etc.
2. Those who engaged in some sort of active money making, and did well with it. This would include business owners, professionals who have their own practice, and what you might think of as active investors like traders, real estate developers, and so forth. Notably, these people make a lot more money than the average person; and in the really successful cases, manage to keep their living expenses from growing at the same rate as their revenue.
3. Those who are extremely diligent at being financially responsible, across the broad spectrum of variables, their entire adult life, and who pile up a win one grain of sand at a time over a period of decades.
There are other paths to the goal than just these three. But in my experience, these three are the most common.
What I think is significant about all of these is that they inherently require aspects of extra effort, or sacrifice or both. These people did not get into the win column by accident, nor did they get there without paying a price. They might not have gone so far as to make their entire existence about amassing wealth and nothing else. But neither did they ignore it or act on any feelings of being slighted at having to make some sort of investment.
Whether they meant to or not, these folks found a way to take up a middle position within the paradox. They did not let money become everything. But neither did they lose sight of the fact that money troubles can foster far-reaching pain, and as such, are worth making an effort to prevent.
On all fronts, those are good examples to follow.
By Brad Thomason, CPA
A lot of people are wondering right now what to make of the stock market, and what to do about it.
There have been a number of points throughout the history of the last hundred years or so in which one could pile up all the theory and logic in the world on one side of the scale, and what actually happened in the market on the other, and the comparison would not even be close. Sometimes for good, sometimes for ill, what actually happens in the market can at times be the utter opposite of what should have happened, based on any sensible notion of how the market supposedly works and what it is supposed to represent.
Since 2000, you can find entire ten-year periods in which the market gained less ground than it did within the last year. I’m not sure either one of those facts make sense. But I am sure that they happened, and that investors were affected by that market activity far more than they were by the mountains of academic papers stating that the market works a different way.
One of the features of market activity the past couple of years has been a tendency for a few tickers to drive most of the net growth, while most of the others sort of milled around, netting out each other’s moves within the index measurements. This past period will be held up for many years to come as an example of why you just want to own the index and not try to pick individual stocks. If you were picking blindly over the past few years, odds are you would not have picked the relatively few that did the moving. But just because we have undeniably seen this sort of behavior recently, one cannot assume that it will continue to be that way in any sort of stable form going out into the future. It might. But, also, it might not.
Moments like these lead to a lot of head scratching. The question of what to do gets muddled with the question of why did this happen, and the result for a lot of people is a kind of paralysis. No one knows what to do, so they don’t do anything.
When I have conversations with people about this topic I usually suggest that they stop trying to figure out why the conditions are as they are. You don’t have to be a properly-calibrated theorist to make money in the market. Or lose it for that matter. Pondering why is not such a productive act, especially if it isn’t your job to be able to (try to) explain it to others.
Instead, focus on the action step. Because, it turns out, that may be a good bit more straight-forward.
If you haven’t retired yet, the standard response to a run up in one of your asset classes is to rebalance. You still face the question of whether to stick with the allocations you had before the period of increase, or whether to go hunting for some new opportunities. For instance, a lot of equities in other parts of the world have really taken a pounding during the last 18 months. So if you do not have an international allocation, now would be a good time to ponder adding one. Or, you can just use some of the gains from your US stocks to further build other domestic allocations in bonds, real estate, whatever. But either way, taking some action is probably better than doing nothing. A market run up provides you with a lot of new data, and new data is generally a good reason to reassess old decisions and plot new actions.
If you have retired, I would regard the matter much differently. If you’ve read any of the other materials on this site you probably know that I generally take the position that the risk of the stock market is not an appropriate one for those who have already retired. That goes double in cases where the person has reached a level of assets where it looks like they will be able to successfully fund their entire retirement need. If you’ve won, get off the field. That sort of thing.
Well, if you are already retired, and you had enough to endow your retirement, and you have still been in the market through this run up, congratulations. You gambled and won. So what’s your action step? Guess that depends on whether you want to keep gambling or not.
I find that a lot of retirees push back on the idea of exiting the market because they think doing so somehow violates some theory or directive that they think they are supposed to be following. They’ve read some book or listened to some talking head who has said that one is supposed to remain invested.
But if you press these authorities-on-the-matter for substantive reasons as to why that should be the case, most of the answers come down to being able to leave more money to someone else when you die.
Now, don’t get me wrong: I think leaving money to your kids or your church or a favorite charity are all fine goals. I just question why they would be on par with making sure you have all of your own financial needs covered. I don’t think they should be thought of as equals; one is much more important, to my way of thinking.
So, if you are retired and wondering what to do about the stock market, am I telling you to take the money and run?
I’m telling you that you certainly ought to give it some thought.
By Brad Thomason, CPA
When you are working as an analyst – professionally, or in your daily life, even doing something mundane and inconsequential like sorting through Yelp reviews while looking for a place to eat lunch in a town you just happen to be passing through at lunch time – the fact that you are looking at data makes it easy to lose sight of another fact: every one of those data points within the set came from somewhere. Every one of those data points is the result of something actually experienced by a firm or an individual.
COVID case numbers come from real people, sitting at home with an absurd fever, thinking that this stuff really is as torturous as they say.
Unemployment data represents people trying to find work to feed their families, and not being able to do so.
Even those Yelp reviews (presumably) represent actual food put on actual plates and enjoyed, or not, by actual people; one meal at a time.
Point being that while data in its accumulated form is a practical way to get general impressions, it necessarily strips out much of the information associated with the origin story of each data point. It sort of has to, if you think about it: otherwise, the analyst would be overwhelmed with information and not able to do anything in the way of drawing conclusions and contemplating decisions.
But in the face of all that, it is nonetheless important that, while the data might differentiate simply between employed and not employed, there is a whole lot more to the story. Every story. Every single one of them. Perhaps millions or even billions of them.
So with that as preface, at the level of data, what can we say about the impact of the last 17 months?
We can say that it has been a period where the productivity of the human race was reduced. On that score, I don’t really think there could be any legitimate argument. I also think any reasonable person would have to admit that is a monumental event/development/occurrence, one which is likely to have truly far-reaching impacts which in some way or another touch many lives.
But which touch points? And how many of them? Well, that is the question, isn’t it.
Our particular interest in this space is the impact on investors, both retired and preparing.
Some investors will experience changes in income dynamics of interest payments or dividends.
Some investors will see changes in valuation, and these may not be completely sensible, nor single point events. Some will see asset prices drop to levels that seem ridiculous based on the fundamentals, while others will see the opposite.
But those seeing the opposite shouldn’t rejoice too soon, because a frequent trick that the market likes to pull is the run-up-and-stall. It seems like huge growth in one year, but it’s followed by a period of essentially nothing (in other words, some wobbling – quivering? - but no net movement).
Or worse, it comes back down later.
Project-oriented investors might have to delay their development timeline. Business owners may have to re-capitalize, switch product mix, or adjust employee complement up or down.
And so on. What this means is that we should a) expect pretty much everyone to be impacted and b) expect that the particular impact to differ literally from one person to the next.
I also think the financial ramifications of this period have not fully played out. So even if you haven’t yet felt any negative impacts, you shouldn’t be surprised if some show up later. Hope for the best but be aware it could still go the other way.
It is at these times that the value of a well-formed plan is most obvious. When unexpected events occur – good or bad – having an unchanging portion of the picture is extremely useful in figuring out how to react. Having already worked out what you want to do ahead of time, you can simultaneously wear your analyst hat, trying to discern what happened to everyone, as well as your data point hat (because after all, your particular story is one of the ones that makes up the data set), tracking which decisions are most important to consider and which actions are most important to stay, or get, back on track.
Alternately, if you don’t have such a plan, now is a good time to form one. After a disturbance is actually a more calm place to operate in than you might imagine. Moreover, it sets you up to be in a better position the next time the dealer tosses out a wild card; an event history tells us we should assume is coming again at some point, in some form.
By Brad Thomason, CPA
When I was a kid, my dad was a devout and utterly consistent watcher of the daily news. National and World news at 5:30 (NBC, with John Chancellor; and later Tom Brokaw) and local at 6:00 and 10:00.
On slow news days, when they would have stories involving some celebrity, he would often remark, “Are we supposed to know who that is?” It would drive my mother crazy, and she would make some aggression-less criticism about him being out of touch. He would usually reply with OK or Whatever. It had the rote feel of the sort of call and response exchanges that are often part of religious services.
The Lord be with you…
Well, I don’t think it’s strictly genetic, but I have become aware in recent years that I frequently see headlines about folks who, by context, obviously must be celebrities. But I have no idea who they are. I see articles in business publications about how people over 30 feel like they are losing touch with culture and, by proxy, reality. How they feel insinuations of obsolescence even as they are only reaching the age that for decades (at least) signified the point where most were just starting to hit their stride. It is accepted and unchallenged dogma that we are living in a fast-paced world where little remains as it was and that the present gives way at break-neck velocity to a future so dynamic that nothing which came before could possibly hint at what’s to come next.
But is that what’s really going on?
In the midst of new technological innovations and rapidly changing popularity of this idea or that person, it’s easy to get lulled into thinking that there are no sands but the shifting sands.
But haven’t younger musicians, actors, athletes been replacing older ones for as long as you’ve been alive?
Isn’t the idea of ‘this year’s fashions’ an ancient one?
Doesn’t gravity, electricity, photosynthesis, lunar orbit and the desirability of honest – to - God backyard tomatoes still work the same as always?
And as for innovation, does the umpteenth new social media platform really count? I mean, how many different ways to stay in touch does the human race really need? And whatever that number is, haven’t we already surpassed it?
The hallmarks of good financial management that existed on the day you were born remain the standards today: work for what you need and want; live within your means; prepare for the day when you won’t be working anymore so that you can still live comfortably without burdening anyone else.
Now it’s certainly true that the chaos of popular culture finds its way into the financial markets from time to time. New investors enter the market and presume that all of the existing players are morons; speculative frenzies – GameStop, Bitcoin, Tesla – catch fire, only to be set down later for the next hot issue; politicians say and do things to pander to voters looking for ‘new ideas’ and not-stale leadership. So, we can’t ignore these things altogether.
Still, we can’t let them trick us into thinking stability and inertia no longer exist. Many of these elements of change are just the latest versions of what the world has seen many rounds of before, no different than the changing crowd of performers that gets invited to the Grammy’s every year.
The risk here is to assume that if you don’t keep up, if you don’t have the latest financial app, if you aren’t fluent in crypto-currencies, if you aren’t monitoring what’s coming down the pipe, then you are per force falling behind, with ever-dwindling hopes of being able to cope with the world. That the prospects of success are dimming before your eyes, and that basic survival itself could be next.
My advice: don’t fall for that. It isn’t true. The game is still about what it was always about: having enough money to pay for what you have deemed to be your version of a comfortable life. The delivery of financial and economic information may have changed, and the current data may be influenced by current fads, but the core machinery is as it always was; making it just another aspect of the world that is much more prominent than we sometimes realize.
When I cook a steak over a charcoal fire it works the same way it did when I was 20. When I fish a stretch of shoreline, I find that hooks and tree branches still have the same affinity for each other that they ever did. Dogs manage to hold on to the image of being obedient, despite a compliance rate far less than 50%. Have things changed? Sure. But not everything; and maybe a lot less than we sometimes think. Especially when it comes to the stuff that has the biggest impacts on our lives.
I’ll stop there. Going to go out and throw the frisbee with the kids for a bit. Have a nice day, and perhaps a warm beverage, too. Come to think of it coffee and tea have lost none of their power, best I can tell. Something to think about.
By Brad Thomason, CPA
Did you ever take one of those Myers-Briggs personality tests? Did you know that the type of personality that you have may make it easier (or harder) for you to find the mental energy to engage in retirement planning?
As you probably know, the MB test gives you a four-letter code which is associated with one of sixteen particular personality profiles. Each of the places in the code is associated with a pair of possibilities. The second letter will always be either an S or an N. S stands for “sensing,” and it basically speaks to the idea that you are primarily a concrete, objective sort of person who needs to see it/touch it/hear it etc to feel like it’s an aspect of reality worth paying attention to. N, on the other hand, stands for “intuiting,”(The letter I was already taken by introverted, in the first-position pair) which is something like a willingness to be more open to abstractions, conceptualizations and other things that don’t have a basis in one of the five senses.
Now to be sure, every person has some degree of openness to both means of interacting with the world. It’s just that we tend to have differing degrees, and as such one generally ends up being favored over the other. Even if we aren’t consciously aware of the preference.
So what in the world does this have to do with retirement planning? A lot more than you may think.
It turns out that our preferences about dealing directly with what is there or is not there impacts how we tend to experience time. Think about it: if you are focused on sensation then you can deal pretty directly with whatever is going on right now, as well as things which have already happened. But what about the future? How do you interpret the future in terms of sensory inputs when those events haven’t occurred yet and those sensation haven’t been created? The simple answer is, you don’t. And therein lies the crux of the matter.
A common misunderstanding about personality types (whether as defined by Myers-Briggs, or any of the other scales, such as the Big 5) is the idea that it reduces the person to being nothing more than a product of fixed wiring, in which the person really has no choice other than to following their programming. This is not the case. All persons are completely free at any time to engage in behaviors which are counter to their personality type. The personality type simply identifies preferences, not absolutes which must be followed.
But even though there is nearly unlimited freedom to go against preference, most folks can’t do so without paying a price. That price, in most instances, is that you find the against-the-grain behavior to be more tiring. Which if you think about it, sort of wraps back around to the idea of preference: if A makes you tired and B doesn’t, which one would you prefer?
Admittedly it’s all about circular, and perhaps even a bit vague. But the bottom line is that people who have S as the second letter of their code often have a harder time thinking about the future. Not that they can’t do it; just that they have to work at it more. Intuitive persons, who typically are more comfortable with abstract concepts and idealizations about how good things could be, frequently find themselves thinking long and hard about the future as part of their daily routine, without even meaning to.
In terms of distribution, in most western populations, there about two S-people for every one N-person. So more folks than not are going to be susceptible to feeling the elevated brain-drain when they think about the future. You are intelligent enough that you do not need me to tell you that just because it might be harder, it is still necessary. That’s pretty self-evident.
But I brought all of this up just so you would know that if you find it grueling to spend any significant time focused on the task of retirement planning, it’s not all in your head. Well, I mean actually it is all in your head. But it isn’t imagined. It’s real, and potentially rooted to something that you can’t do anything about. So like every other significant accomplishment in your life to this point, the simple (if not easy…) solution is to engage it proactively, put in the work, and win anyway.
As a final item, if you have ever wondered how folks like me could make a career out of dealing with something that most folks find exhausting, it may be nothing more complicated than being on the opposite of the ledger from where you are: I’m one of those N people. So it seems a lot more natural – not to mention far less tedious – to me to think about what could be, rather than to focus on what has already happened or needs to happen today. Those things wear me out as much it does for you to engage in planning.
In the final analysis, I don’t think it’s a case that one is better than the other, in terms of the big picture. But at the level of individual tasks, it certainly does seem to impact fitness and ease of performance from one task to the next. Doesn’t change what we have to do. But there is subconscious machinery at play here, and if you find the prospect of working on your retirement plans daunting and/or grueling, it may not be a lack of motivation or willpower on your part, just a simple matter of how you were wired at the factory.
By Brad Thomason, CPA
Wisdom is one of those words that if someone asks you for a handy general definition you will immediately begin to fumble.
I do not have a good one to offer, myself.
But I do think the project of wisdom is a lot easier to state: wisdom is what we rely on when the correct answer is not obvious.
It does not take wisdom to decide to stop when the light turns red.
It does not take wisdom to know that a ten-dollar bill will cover it when the lady at the drive-thru tells you the total is $9.38 (can you believe how expensive fast food has gotten?).
It does not take wisdom to tell the eight-year old that she can’t jump off the roof.
Rather, wisdom is what we rely on when we don’t have much else to turn to. Seen in that light, in some respects wisdom is a negative; a necessary evil; a thing we’d just as soon never have to turn to, given that most of us prefer clear and easy answers.
The phrase I like best to describe these kinds of situation is “judgment under uncertainty,” in other words, the need to decide even though you can’t be sure. I’m not sure who coined the term, but I first came across it in the work of Daniel Kahneman and Amos Tversky. They published a very influential paper by that name in 1974. Further development of the concepts they explored spawned a whole shelf of plain-English books about the science of decision making, and eventually resulted in a Noble prize (Economics) for Kahneman.
Interestingly, by 1974 the study of decision making as a formal pursuit was already well underway. Most attribute the beginning of the field to a 1944 work by John Von Neumann and Oskar Morgenstern (Theory of Games and Economic Behavior). The term “game theory” derives directly from their book.
That notwithstanding, they were hardly the only ones thinking about it. In the waning days of World War II, Peter Drucker, who many regard as the father of modern business management, was taking an in-depth look at how the war had affected manufacturing at General Motors, and how the company moved from decision to decision in the face of not knowing exactly what was happening with demand for civilian automobiles, nor military vehicles and equipment. His work was published in 1946 in a book called Concept of the Corporation, a title likely known to every MBA program in the English-speaking world.
And these more modern works really just re-raise notions first hinted at in the wirings of the world’s ancient cultures. This is not a new problem for human beings. In fact, it may be the oldest.
We all experience these instances of judgment under conditions of uncertainty, whether in terms of job and career, raising children, or preparing for and managing retirement. In these moments, what we should do is less obvious than the fact that circumstances are making it clear we’re going to have to do something, and perhaps do it soon.
This is a topic I raise with some frequency because I believe it is of high importance to be able to quickly realize the type of situation you’re in at a given moment. Are you in a clear situation with a right answer available, or one where you’re going to have to weigh the various factors, never knowing for certain that you got it right, but having to act anyway? If you spend your time looking for a certain answer in a situation where one’s not available, you can waste a lot of time and resources and find yourself at the point of action completely at a loss about which direction to go. Not to mention overwhelmingly frustrated, too.
I find guidance for these types of wisdom-requiring circumstances coming from some principles I learned early in my career as an auditor. If you think about it, an audit takes place when someone makes an assertion, and there’s a desire to know if what they are asserting is correct or not. The auditor doesn’t really know ahead of the exercise; in other words, there’s no obvious answer at the outset. If there were, and audit wouldn’t be required. So that seems analogous, to me.
A good audit almost always includes (at least) three things: an effort to account for everything, a methodical process designed to work through each piece one at a time, and an awareness that getting through everything may be time-consuming.
Next time you find yourself in a situation where wisdom is going to have to be brought to bear because a clear answer is not on offer, don’t waste your time trying to hunt down certainty. Instead, use the time to “audit” the situation so that when the moment of action arrives, even if you aren’t entirely sure what to do, you won’t be guessing blindly. Even if all you can accomplish is ruling out a couple of options that probably won’t work, your odds of a positive outcome improve.
Moreover, you will be less prone to second-guessing and beating yourself up afterwards, thinking that there was a right answer which you simply failed to find. No one likes to take an action and have it followed by a set-back. But if the outcome wasn’t clear, nor the relevant factors within your control, that argues pretty effectively against the set-back being your fault. Sometimes the receiver drops the ball. You can’t let that shake your confidence in your ability to throw the ball; nor use it as an excuse to stall the next time a ball needs throwing.
Just wouldn’t be the wise thing to do.
(see what I did there?)
By Brad Thomason, CPA
Today I wanted to mention a risk we all need to be on the lookout for. I’m using the definition of risk from the insurance perspective: something that might go wrong and create a loss. ‘A building might burn down’ is a risk; ‘a building did burn down’ is a casualty (i.e. the thing that could have gone wrong actually did). Even though there’s a financial slant to this, I wanted to clarify that I wasn’t referring to the nebulous idea of investment risk, at the moment.
Over the next few months we’re all going to be seeing news articles that talk about this statistic surging or spiking, and that statistic plummeting or something like that. Frequently these will be accompanied by robust amounts of speculation as to what these developments mean. There’s always some volume of content like this out there at any time. Sort of a type of background feature that’s just part of living in a world where writers are competing for eyeballs, and some of them are willing to use exaggerated (ahem, misleading…) language to get them.
But right now the likelihood of such stories is greater. Why? Because we’ve just come through a period of legitimate upheaval, and when this year’s measurements are compared to last year’s, there really will be some big changes.
In fact, we’re already starting to see them. Movements in things like the price of gold, the price of oil, yields on Treasury bonds, changes in unemployment figures – all of these are showing percentage changes which are big enough to draw attention.
But the question is do these types of changes actually matter?
But keep in mind that the main reason people track changes from one period to the next is to hunt for clues about the direction of progress, or to get early detection about changing conditions. Implicit to such approaches is the assumption that the world has been rocking along in a type of equilibrium (a term I’m borrowing, this time, from the economists’ dictionary) and that a change in one measure or another may signal some sort of disruption to the equilibrium. The reason people look for things like this is to a) take defensive action to protect gains that they racked up during the preceding calm, or b) to get in position for some new opportunity which may be about to come along.
Would you classify the year we’ve just had as calm or an equilibrium situation? Me neither.
Which is the point. The data that came out last year, when compared to 2019 (i.e. back when there was still an equilibrium), gave us a gauge as to the extent of chaos that the pandemic was causing. But now, the fact that the pandemic caused chaos, is old news. Using the tools of calm-transitioning-to-chaos, as a means to measure chaos-transitioning-back-to-calm (we hope) is a mistake waiting to happen.
The risk is that the language of headlines and the degree of movement in a particular statistic causes us to lose sight of the broader situation. If something doubles from a period of stability, that’s probably noteworthy. If something doubles because it cratered last year and is merely resuming pre-event levels, though? Likely a lot less important. Which in turn means it should count a lot less in making decisions and taking the follow-on actions that such decisions suggest.
Effective analysis for the rest of the year may come about by looking at the numbers less closely, rather than more closely. Not to mention tuning out the various prophets of doom or revolution. We should not be surprised by outlandish comparative measurements for the next few months, we should expect them. Something to keep in mind as you steer your finances while life moves past the pandemic.
By Brad Thomason, CPA
I have come to accept what many a chagrinned fisherman before me has also surrendered to: the fact that February is just not a good month for us here in these ole United States. Other than Florida, the prospects are just too hit or miss; and even in Florida the circumstances are by no means certain. Florida gets winter weather (relatively speaking, anyway) too, and passing systems work the same way as that little cup you put the dice in when you play Yahtzee. Fantastic fishing one day can evaporate by the next, only to reform elsewhere. Or it might not. If you go to Florida, and you are willing to move day-by-day, for up to a couple of hundred miles, switching up your target species as conditions dictate, you can do some good in February. But that’s about the most you can hope for.
When friends ask you the week before what the plan is, the first reaction is to guffaw and declare you wish you knew.
The old expression about man planning and God laughing seems much too close by to be amusing.
There are a lot of things we deal with that we simply have no control or even influence over. This has led some to question whether planning – for anything – really makes much sense at all in the final analysis.
I’ve always thought of having a plan as less a declaration that the people are in control, and more a reference to work back to when circumstances knock you off course from time to time. A plan represents intent which persists beyond the current moment, and maybe for many decades out into the future. The paradox of the whole situation is that virtually no one ever pulls off a plan as it is originally conceived, and yet no one who ever accomplishes much over a sustained time period does so without meaning to, and working toward it. In other words, executing a plan of some sort, such as it may be.
We frequently engage in an exercise around here in which we consider the question, “What would I do if I were the king/queen of the world?” In other words, if you could have things go any way you wanted them to go, what would you bring about? The fact that you can’t just wave a magic wand and make it happen doesn’t matter. Answering the question focuses your thoughts and often makes quite obvious what you should be working for. That understanding becomes this line of intent that I’m referring to.
As events play out, there’s no real choice other than reacting to them in the moment, and then taking stock once the moment has passed. Will you persist with the same approach, or adapt to a different one?
It’s much harder to answer that question if you don’t know how you would like to see things work out in the end.
So we plan. Not because we think we are in control. Not because we think we’ll be left alone by the universe to do our work uninterrupted. But precisely because we don’t expect those things. When things don’t break our way – either because we didn’t control something we could have, or because it was never in our grasp to begin with – we are better off if we can shake it off quickly and get about the business of figuring out what to do as a result of it. It is in that moment, when instability is running highest, that the existence of the plan reaches its highest importance, too.
Unless we’re still just talking about fishing. In which case, waiting for March is probably the better bet.
By Brad Thomason, CPA
A frequent topic in discussions about retirement planning takes the form of questions like Am I on track, and How much money should I have at age X?
It’s not hard to see where questions of this type come from. Getting in position for a successful retirement doesn’t happen overnight, so it’s only natural to want to get some gauge on the progress of the undertaking.
Unfortunately, I think this may be an area (yet another one…) where firm answers are not easy to find. Consider the following two cases.
Our first thirty-year old got a degree, got a good job, has worked diligently to take advantage of opportunities and has been among the most rapid advancers within her profession’s peer group. She doesn’t have any debt to speak of other than a mortgage, has a written budget which she follows faithfully and already has material, positive balances in all of her savings and retirement accounts.
Our second thirty-year old has a job, but is in all respects just a mediocre performer. A number of younger persons have already out-paced him in terms of career advancement. He spends more or less what he earns as soon as he gets it, has a lot of toys to show for it, and a collection of credit card statements, as well. His spending varies widely from one month to then next, and is far more likely to follow what he wants than what he needs, or how much cash is available to pay for the purchase. Other than a few hundred bucks, he has no savings to speak of.
Now if I ask you which one it would be better to be, I think that the near-universal response would be the first.
Yet nothing in what I have just presented actually tells you anything at all about the odds of who will or won’t eventually succeed in retirement (where ‘succeed’ means something like having enough money to pay for everything that there’s a need to pay for).
What I have told you does not account for the possibility that our diligent subject, despite unassailably responsible behavior, ultimately fails because she lives to be 99 years old; while the other one succeeds – financially, anyway – by having a lethal heart attack at age 72, before he has a chance to go broke.
What I have told you does not account for the possibility that our second character wakes up one morning in his mid-fifties, realizes how careless he has been over the course of his adult years, and motivated by both shame and fear, goes on a fifteen year earnings kick the likes of which our buttoned-down first subject would have never even thought about for the simple reason that she didn’t need to think about it.
The point is, looking at someone’s “progress” a long way away from when that person will retire has little predictive value. The further away, the less it has, likely to the point of telling you nothing at all. Too much can change as the years go by, and some of the possibilities can be quite large relative to the pieces of the equation that were being examined before the event. Just ask Jed Clampett. Random events are not obligated to be one particular size or another; they are uncertain both as to occurrence and impact. Which ends up being a really important, but not-so obvious, part of the equation.
Ultimately the measurement which matters most is the one you do at the point that someone is about to pull the trigger on retiring. On the day you plan to retire, do you or do you not have the resources necessary to consider the upcoming task (of paying for the rest of your life) to be fully endowed? Note that this is a binary question. It’s either a yes or a no; whereas the same question, asked every other day leading up to The Day, would have to be answered as some sort of inexact maybe/maybe not (again, because of those random events being possible).
In practical terms, people are not going to stop wondering about what their progress is. But in the midst of that exercise, I suggest that people keep two things in mind.
First, the appearance of being on-track is not a guarantee of a successful outcome in the making.
Second, being behind in your progress (by whatever method you wish to try to estimate that fuzzy notion) doesn’t impact your ability to make future progress, and do so for as long as you continue to try. Nor does it preclude you from pushing your retirement date out, should you decide to do so.
The only measurement date that really matters is the one that coincides with the day of action, the day that you hang up your spurs and retire. Even though you can check the score any time you like, remember that doing so is no different than checking in with five minutes left to go in the second quarter, the end of the fourth inning, after round six, etc. Maybe it tells you something. But it really doesn’t tell you much. Although it can certainly lead to you think it means more – for good, or for bad - than it actually does.
So if you choose to check early, remember to proceed with caution.
Older blogs (2015-2017)