Which Is Worse – Certainly Bad or Uncertainty?

The feeling for each is similar. Uncertainty always feels like the risk of bad and certainly bad is just that. The difference is in the response.

What to do

If something is certainly bad, people tend to seek solutions or at least ways to mitigate it. Most bad things have answers. If you come down with a disease, you can find treatment or at worst find there is none and arrange your  affairs better. If your cost of living is too high, reducing it earlier matters.

Uncertainty leads to surprises when the uncertainty comes clear. Treatment may no longer be available or things remain disorganized. You cannot do much until you know what is going on and what that might lead to.

That’s what context is about. The first step is to understand your context.

How that applies to retirement and estate planning

I have a cousin who has had a successful business career. When asked if he could retire his response was, “I think so, but you never know.”

He is right because the future always brings things to us that we might not have anticipated. I don’t have any quarrel with the “you never know” part. I do have a problem with the “I think so” part. There is no good excuse for not knowing that.

Projecting the future.

A good thing about retirement and estate planning is it is easier to project. There are not so many variables. Lifestyle is mostly known. Resources are clear. The time horizon is nearer. There are fewer new things to try. It is possible to create a pro forma idea of future cash flow and the inevitable estate.

It is time consuming to get it right, but not impossible. The trick is to be organized and reduce the extension of what you know to three variables. How much will you spend, what will investments earn, and what is your inflation factor.

Once you have a model like that, you can begin testing it for the possibility of failure, given your key variables.

The ideal

In a perfect world, you will have after tax cash income that just barely exceeds your spending. Properly organized each year in the future will meet that condition. Having too much income early usually means paying too much tax early and thus having too few investments to generate the income you need later. Keep in mind you don’t spend income, you spend cash after taxes. Sometimes spending tax paid capital and letting tax deferred income grow works. You can test for that.

Understanding lifestyle spending matters.

It breaks into as many as four parts. These are:

Necessities of life: Food, shelter, transportation, recreation, communication, healthcare

Conveniences:  Second car, gifts, better or more recreation, better food and meals out, fashion, some travel

Luxuries: Nearly an inexhaustible list but the common one is often more, or more exotic, travel. This one is harder to manage because we tend to think in local currency but travel often involves others. For example, in 2011 the Canadian dollar would buy about $1.06 US Dollars.  By the 2019 it averaged about 75 cents US. So travel, often denominated in US dollars, cost whatever the American inflation rate was plus nearly 4%. I have clients who spend 50% of their budget on travel. To use CPI to project their future is misleading.

Disposables: some people own things they use now but will dispose of as they age. Maybe a ski chalet, maybe their principle residence, maybe cars, art, or other. The expense for those will go away at the same time and may free some investable capital at the same time.

You care because ach category of spending has a different inflation rate. Necessities will tend to follow the CPI while the others will have a CPI component but also have a depreciating lifestyle factor late in the projection. The second car may go, travel may become less frequent, some recreation will disappear.

Most people have a reasonably flat cost of living by age 85 despite inflation.

You can test the whole thing by assuming different inflation rates and different yields if you want. Be cautious if you use average rates. While the average rate of return may work out to some number, the order the results appear matters. Test for that effect.

If you must use averages us an investment assumption that is related to inflation. If inflation is 2% then yield might be 4%. Despite some tax effects, you will get a very similar answer if it turns out to be 6% and 4% or even 8% and 6%.

Thinking about the estate

The free thing in doing this is the estate will just appear. In the estate, be looking for opportunities to reduce costs. Income tax, probate, and other related costs are manageable but only within limits. You should aim for “the irreducible minimum.” It is possible to go lower than that but the cost and family dislocation to do so may well outweigh the benefit.

Retain a reserve for health costs. Know what a retirement or care facility would cost. Project it in your cost of living numbers. Don’t forget you conventional cost of living will change then too.

Look for liquidity. Your estate costs will be paid in cash and if there is not enough available it will take longer and expose some assets to market risks and sales costs. Liquidity ahs a cost and that cost is often higher than it need be. Consider second to die life insurance as an effective solution.

Look for the ability to transfer some assets to children while living. Capital at 40 is a lot more valuable than capital at 65. Plus you ge to see the value. If you choose not to do this, consider stewardship issues. If you have money you will never use, it should be managed on parameters that reflect the heirs’ position.

Consider charitable bequests. Most estates have significant tax liabilities. By introducing a charity as an heir, the money available to the charity is magnified. Each dollar the estate gives up can benefit the charity by as much as  $2.00.

What you gain

Predictability has a high emotional value.

When you know the cone within which your living and finances work, you can make better decisions to optimize your retirement and your estate. There are tools and techniques that will help. Having the projection allows you to focus on what you need and can do instead of just worrying about it.

Although maybe worrying works. , I had an uncle who claimed it did. “Nothing I worry about ever happens.”


I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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