Let me describe the problem with financial planning with a real world scenario. Have you ever taken a drive to the Rogers Centre? If you’re not sure what the Rogers Centre is because you aren’t from around here, the Rogers Centre is the baseball stadium that is home to the 2019 World Series Champion Toronto Blue Jays (okay, I may be the only one making that bet in Vegas this year). So, assuming you are within a reasonable distance from the stadium, have you ever take a drive there to see a game? How far is it from your home?
Let’s assume that it is a 1 hour drive for you to get there. Let’s also assume that you are a diehard Blue Jay fan and the idea of missing the opening pitch would destroy you. So you’ve got tickets for the game and opening pitch is at 7:07pm. What time do you leave your house? This is a question I often put to clients to help emphasize a point. The answers that clients give vary greatly but it usually goes something like this:
“I would leave my house 2 hours before the game”
“I would leave home 4 hours before the game”
“I would get a room at a hotel that’s just up the street and stay the night before so I won’t be late”
Okay, so that last one is a bit extreme but it gets the point across that when we are planning our life for the things that are important to us we always leave a margin of safety. There could be bad traffic, car trouble, difficulty in finding parking, a crowd to fight your way through. A lot of things can be out of our control and we have to leave room to adjust for the unknown to make sure we get to the game on time. So why don’t we do that in planning our finances?
Often times, financial planners will work with clients to build a plan to provide the clients’ desired lifestyle and achieve their retirement dreams. A very intricate plan will be drafted based on industry standard expected returns (determined by your desired risk exposure), to reach retirement at the age you determine, to provide exactly the income the client states they need and a regular investing plan is set. This is what I call “financial planning with a scalpel”; a plan that assumes everything will happen as projected and life will move forward in a straight line.
So where’s the margin of safety? Does anyone out there really think life will move forward in a straight and predictable line? Too often I have seen the plan delivered to clients and they begin saving exactly what it states to save with no thought to building some room to absorb the unexpected. Here are just a few ideas to help create that safety in your plan:
1. Build a plan that can accomplish your goals at a lower rate of return than what industry standards say you should expect (since we can’t control results). 2. How about planning to be ready for retirement a couple of years before your intended retirement date?
A recent survey showed that as many as 37% of people retire earlier than expected for reasons like being downsized or health problems forcing early retirement. 1 3. Add to your assumed lifestyle costs an extra 10%-15% to account for unforeseen expenses. 4. Plan on some out-of-pocket medical expenses in retirement, for an individual health plan or uncovered costs (this is one of the largest concerns for retirees today). 5. When the plan says to save $X per month, how about savings $X + 10%?
Only you can determine how much “safety” needs to exist in your plan to make you feel safe – You could use all of these ideas but then you may not have any money left over to eat. Talk to your advisor to make sure your plan will be able to withstand some of life’s unexpected curve balls. That was not an intentional metaphor to bring us back to the beginning talking about the Blue Jays. But, hey, if we all do this right and achieve the lifestyle that we want, maybe we’ll end up sitting next to each other at a game some time. Be sure to say “Hi” if we do, and Go Blue Jays!
Until then, I wish great success to you and your family.
1 as stated in the Study “WHAT CAUSES WORKERS TO RETIRE BEFORE THEY PLAN?” published by The Centre for Retirement Research at Boston College – September 2015
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Michael Larocque is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.