September 25, 2018 / White Oaks Wealth Advisors

The Conundrum of Financial Planning Math

With little question, financial planning math is a critical element to shining a bright light on the best path forward for a secure retirement and financial future. Yet, while in many areas of life math provides certainty, the inevitable variability of the assumptions necessary to do an adequate long-term projection the focus needs to shift to probabilities and away from certainties.

financial planning math

Our expectations when we use math to solve a problem should have different expectations. In measuring a room to see if the new couch will fit, the math we use is precise. The length of the wall and the depth of the space available do not change. Taking a careful measurement will result in a precise answer and a certain result. Math and certainty are ingrained in us. When we took a math test there was an answer that was correct and one that was incorrect.

Probability Versus Certainty

Financial planning math is more like weather forecasting than measuring the room for a new piece of furniture. The commonality is that that, unlike measuring the room, the financial planning math assumptions do change, Weather forecasting also uses data that is flux and not precise. In financial planning math and weather forecasting, the math is about probability since certainty is not possible.

Seeing a number like 95% probability of something happening does provide a sense of confidence moving forward. At the same time, it is not useful to assume the base numbers will be precise. It is entirely normal for the rate of return, inflation, and other assumptions to change. The statistical analysis used to show the probable path assumed that they would change constantly. In fact, any actual number that is precisely like the assumption is merely convenient and not necessary to a successful outcome.

Financial Planning Math Requires Judgement

Wisdom in crafting a successful financial plan comes from recognizing the probabilistic nature of the financial planning math. Precision is an illusion in a constantly changing world. Financial planning is a process, not an event.

The foregoing content reflects the opinions of White Oaks Wealth Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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Investment advisory services provided by White Oaks Wealth Advisors, Inc. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.