How do you make decisions in the face of uncertainty?
I think that one of the reasons that people don’t focus on financial planning is that there are just too many ‘I don’t knows’. Here are some:
I don’t know what country I will retire in
I don’t know my income needs now or in the future
I don’t know how much money I need when I retire
I don’t know how long I plan on working
I don’t know what I want from life (that’s a big one)
I don’t know what future market returns will be
I don’t know how much risk to take
I don’t know how long I will live after retirement
I don’t know how much money I can save
I don’t know what I need to educate my children
I don’t know….I don’t know.
How could we ever make decisions in the face of all that uncertainty?
Carl Richards explains the process really well. He writes:
“I tell my clients that I’m giving them permission to let go of the need for precision in planning. Make the best guess you can and then move on. Put a stake in the ground thirty years out; think of it as a marker that you can always move later when you have more facts.”
This is a lovely way of thinking about it – a stake in the ground thirty years out (or twenty years, or ten years - it's NEVER too late). Ben Carlson urges us to remember that financial planning is a process, not an event. It’s like a flight plan – “the flight plan is really just the pilot’s best guess about things like the weather, (the things that he has no control over). Whilst the plan is important, the key to arriving safely is the ability to make the small and consistent course corrections.”
There is an old saying that it is better to be vaguely right than precisely wrong. Never has this been more true than in financial planning. Because saving for retirement is something that we only have one shot at. If you get to 70 and realise you have failed, you can’t go back and try again. We only have one chance.
Taking a good hard look at your finances and making the changes that are needed to get you on the right course can be an uncomfortable process (although I try to make it as fun as possible!), but running out of money in retirement is really uncomfortable too. As someone said recently, money doesn’t seem important until you don’t have any. Don’t leave it to chance.