Keep Track of Your Plan

All financial plans rely on a few variables.  Income, investment yield, spending, inflation, taxation, debt, savings and duration being the usual.  People do their plans with a view to gathering an idea about how their decisions will work out in the long run.  Usually retirement.  Sometimes death.  By manipulating the variables the client  finds a space within which the desired result appears.

Sadly, that set of variables derives from the real world surrounding the client.  That world is less compliant than a model.  Unanticipated things happen.  If one looks at short-term history, it appears as if the unusual is factually more common than the anticipated usual.  That should influence behaviour.

There are some things to clarify:

Taxes materially affect growth.  The general rule of long term tax awareness is if it is good, it will go away.  If it is bad, it will get worse.  A perfect tax plan today could be unworkable in five years.

Interest yield is somewhat tied to inflation but not perfectly.  Anticipating that fixed income investments will yield 0% after taxes and inflation is likely optimistic.  Assuming that equities will outperform inflation by 3% to 4% after taxes and inflation is possible but requires care and discipline to achieve.

Income is reasonably predictable given the inflation variable, but is less so once you include the risk of illness, accident or death.  If your career is something that could result in long downturns and or layoffs, that matters too.

Time matters a great deal.  Compound growth is not intuitive.  The rule of 72 says that money will double predictably.  72 divided by the rate of interest, will give you time in years.  The last double is worth as much as all the ones prior.  Starting early makes it easier or provides a larger margin for variation.

Most people get those and usually behave accordingly.  In the beginning.  Keeping on track over a look time imposes a new task.  The three R’s of financial planning.  Record, review and revise.  The payoff for keeping track is quite large.  People find variations and adjust sooner.  The learn more about how the pieces of their plan work, they learn about how the surrounding world works and varies unpredictably and best of all they learn about themselves.

Søren Aabye Kierkegaard was a Danish philosopher, theologian, poet, social critic and religious author who is credited with being the first existentialist philosopher.  He understood, perfectly, the need for regular reviews of financial plans.

“Life must be lived forwards, but can only be understood backwards”

Plans, like life, are forward looking.  The are approximations.  Guesses.  Review looks backwards and adds to understanding.

Understanding leads to new and improved plans.  Improved plans lead to an easier or  better life and that after all, is the goal.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.


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