161 | When to Run the Other Way

When someone shows you projected levels of spending and investment returns for the next decade or two or three, that's your signal to run the other way.

They're making the future sound more predictable than it will ever be.

Or they've not spent enough time reflecting on the past to appreciate how our financial lives actually work.

153 | Modern-Day MapQuests

A "financial plan" - projecting your future income, spending, saving, and investing returns for the next decade or two - has been the first solution offered by the financial services industry in the post-stockbroker world.

And it seems like something that would be helpful.

But creating a "financial plan" is like printing one set of MapQuest directions today that you'll use for the next decade of road trips.

That's why they don't work like it seems they should.

151 | No Credit Given

Another challenge with Monte Carlo simulations is that enormously positive actions don’t get any credit.

Changing careers to one that is a better fit.

Paying off a pesky debt.

Changing a spending habit.

Freeing up time by paying for someone to help you.

Building up cash on hand for a season.

Improving how you communicate about money with a spouse.

Increasing your level of generosity.

Every single one of these improves your relationship with money.

But if the market moves in the wrong direction in that period, the Monte Carlo will tell you you've gone backwards.

143 | A Tough Look

Baked into a Monte Carlo simulation is the reality that there could (will!) be seasons of abysmal returns at some point in the future.

The purpose of the exercise is to see through those seasons and still assign a probability of success that funds will last beyond those tough times.

But the problem is that once you’re in that season – the season that you predicted would happen – your single metric for measuring odds of success fails you.

“We were 95% certain we can handle the bad times, but now that we’re in them, we’re only 70% sure we can handle them*.”

That’s a tough look – if you knew something would happen, how can you be less certain of the future once it actually happens?

*I’m not speaking to legitimate qualitative things that might change an outlook on the future, I’m only speaking to the way the math actually works with Monte Carlo simulations.

142 | Abstraction At It’s Finest

Monte Carlo simulation is a tool used to run thousands of scenarios of the future to predict whether someone’s assets can last a lifetime regardless of future investment returns.

There are plenty of downfalls to the tool and one is its ability to abstract our real life experience with money.

In a particular instance with a client, every scenario we showed - good returns and horrible returns - confirmed a near 100% chance that the client would not run out of assets from age 65 to age 95.

As we turned to questions and comments, the first reflection was the following…

And I can’t make this up…

“Well, we’ve got to do something because we’re going to run out of money in July.”

I can’t fault the client.

The problem is a direct result of trying to summarize how well we are generating income, spending, saving, and investing to a single number that ends in a percentage sign.

And in this particular case, the client’s bank account was going to run out in a few months if it didn’t figure out which investment account to tap first for funds to replenish it.

A 99+% chance of success in the long run means nothing when we don’t know the first action step for the problem in front of us.

In fact, it often compounds the issue by suggesting everything is OK, when absolutely nothing feels OK.

122 | But How Do I Actually Do It?

Detailed projections love to summarize financial well-being in a single metric, which is often a probability of success.

The trouble is that all of the context is lost the moment this happens.

Imagine if midway through the third quarter, one of the data analysts informed Patrick Mahomes that the Chiefs had an 82% chance of winning the game.

For a fleeting moment, he might have some peace of mind about progress, but immediately thereafter he's going to have questions about how to actually win the game.

He doesn’t need someone to tell him the likelihood that he’ll win.

He needs someone to help him brainstorm the specific plays that they need to run on each of the remaining drives.

He needs someone to help him decide what players need to be around him on the field.

He needs to be reminded of the work they did in practice to prepare for the last 15 minutes of the game.

He needs someone who can have a conversation in real football terms, not math terms that ignore the game that is still being played on the field.

Whether it's football or finances, you still have to play the game regardless of what the analytics say.

121 | Reality Eats Speculation for Breakfast

I don't have a clue how investment returns or cost of living will change over the next few decades.

Even if we trick ourselves into using historical figures, the reality is that assumptions are a nice urban walking trail while reality is a strenuous hike with boulders to climb and weather to endure.

The way you generate income and set money aside isn't any more certain either.

Gutting out a miserable career in the name of modest raises and bonuses each year is not a win in my book.

Nor is pretending that our savings rate will remain steady year after year when life has a tendency of surprising us on the good and bad side all the time.

At best, these kinds of speculation put us on the hook for knowing more about the future than it is possible to know.

At worst, they lead us down the rabbit hole of debating speculative assumptions or trick us into projecting a hypothetical future that will torment us year after year.

A detailed projection slyly turns assumptions into gospel and turns a calculator into a "plan".

On the other hand, it's hard to argue what has happened in the past.

People who like their work will find that their income is more sustainable.

People who are intentional with spending will find that they experience more contentment.

People who have saved before will find it easier to save the next time.

People who have navigated seasons of investment loss will find it easier to be patient in the next downturn.

Reality is hard to argue, easy to access, and practical to reflect upon - and establishing a common understanding of it is the only way to move forward into an uncertain future.

120 | Flickering Questions

Most of us have questions about money and purpose deep within us that flicker like a candle.

Why does what I feel in my gut always feel so different from what we discuss in a finance conversation?

Why does it feel like we can't "catch up"?

There are so many things competing for our resources. How do we decide what should come first?

Why do I always get overwhelmed by money conversations?

Why does this career lack the purpose that I expected to experience?

Is this really all there is to being "good with money"?

Some of these questions are difficult to say out loud because, at best, it's hard to find the words or, at worst, it seems like a silly question with an obvious answer that you should know.

But these questions are the essence of our relationship with money - a flickering candle that only reveals itself if we allow it to shine.

The problem is that detailed plans and projections are the ultimate candle snuffer.

Instead of creating an environment for the candle to burn brighter with a vulnerable, but honest reflection, a detailed projection quickly snuffs out the real questions allowing "inflation", "market risk", "Social Security", and "life expectancy" to rush in and suck all the oxygen out of the room.

Too many numbers and assumptions inevitably confuse even the most financially-savvy Muggles to a point that it's hard to ask the first question.

Snuffing out the real questions and restricting the conversation to clarifying assumptions is no way to talk about money, but that’s what we’ve settled on as an industry.

107 | A Crumbling Pillar: Detailed Plans and Projections

Borrowing from Carl Richards, "Certainty is a promise that can't be delivered."

Whether we realize it or not, detailed plans and projections are promises of certainty in disguise.

For a time, they answered the question that investment management never could, "What does all of this financial wealth mean to me?”

Over time, they've morphed into an annual exercise of attempting to calculate the uncertainty out of the future.

Inevitably, these “products” fall woefully short of contributing to real financial well being because uncertainty and change are the only guaranteed parts of your financial life.

We can all feel it in our gut, but it's hard to have the courage to say it out loud.

No one can calculate the uncertainty out of the future.

It's tough because we want a shortcut to peace, security, contentment, and freedom, but those things don't come from a spreadsheet.

The moment we begin speculating about the numbers of the future is the moment we abstract what we're actually trying to do with our money and our life.

The pillar of the industry is crumbling and we're building a new one.

We will reflect on the past, we will build habits and tweak mindsets, we will even project a couple of years into the future (as long as it is grounded in a verifiable reality), but we will not rely on a detailed, assumption-laden projection to give us a false sense of security about the future.