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.
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.