In my most recent post, Retirement and The Brain Switch, I shared my observations regarding the emotions of preparing and entering the new retirement chapter of life. Intuitively we know that emotions driven by fear and greed or fight or flight that are hardwired into our humanness can misdirect us in today’s world – one that’s absent of saber tooth tigers and wooly mammoths. Yet the amygdala, sometimes referred to as the “reptile brain”, remains a part of our anatomy, and produces the “fight or flight” feeling. But it can be tamed with objective data. Academic research is consistent in that decisions based on emotion frequently result in undesirable outcomes, which is why we need evidence for a successful retirement.
A solid process, rooted in fact, is the most effective antidote to emotional decision making.
Recent Nobel Laureate, Richard Thaler, made his mark researching and identifying aberrant economic decision making processes. The science of behavioral economics championed by Thaler, Amos Tversky, Daniel Kahneman and others indicates that careful examination and process are the tools for insulating the negative impact of emotional responses from financial and economic thinking.
How can one assess the independence and objectivity of a financial plan? This can best be judged by considering the components of a financial planning project; a comprehensive financial plan to enable a strategic wealth management strategy. The following components are the minimum of a comprehensive financial plan.
Cash Reserves: Often minimized in the haste to maximize every dollar available for investment, adequate cash reserves are the key to a coordinated approach to enable true long-term thinking for the investment portfolio. More detail can be found in the C, B, A’s of Portfolio Management.
Risk Assessment: Often skipped over by so-called advisors (brokers) that are associated with investment firms and overworked by advisors (insurance agents). Understanding how to protect property and potential liabilities is simply silly to overlook. Why work so hard to save/invest only to have an unfortunate event wipeout or put a huge dent in your financial assets? Your human capital to produce income also needs to be considered. An objective resource that has no vested interest in selling you something is critical to achieving financial security goals.
Retirement/Financial Independence: Thousands of financial calculators can produce a retirement projection. Each has its own advantages and flaws. Common among them is the data input is not subject to any critical analysis. Often the most valuable part of creating an effective financial plan are the questions that an experienced, independent, objective advisor asks; the questions you haven’t considered recently or at all. The old saying, garbage in, garbage out, certainly is appropriate. You don’t know what you don’t know. A better strategy is to have the resources of a planning team that has seen many situations, both good and bad, and benefit from their questions and experience.
Investment Strategy: Ignoring the investment strategy is equally dangerous to ignoring the parts above. Yet it is clear from our discussions with new clients engaging White Oaks, that it is the sole focus at many other firms. We find that sad since there is so much value that comes from a comprehensive plan. In my book, “The Four Horsemen of the Investor’s Apocalypse” I identified four evils to a financial strategy: Inflation, Groupthink, Volatility, and Global Disruptions and Dislocations. Many focus exclusively on returns as their biggest challenge in retirement but our research shows that inflation and volatility are the least paid attention to and the most destructive. In addition to the the book, our research can be reviewed in the following articles/white papers:
Estate Planning/Wealth Transfer: Most people are familiar with bad experiences with families, loved ones, and money. A well executed strategy, combined with communication can eliminate or mitigate bad outcomes and experiences. With a seemingly endless list of tools to accomplish objectives, a well thought out strategy including various family advisors such as attorney’s CPA’s and others, will optimize a strategy with the best tools.
Special Funding Needs: Other needs such as funding for education, vacation properties, and man more will be put into the planning process for the most effective strategies to accomplish. This will not take place in a vacuum, but in light of the total wealth management plans goals and needs.
With these components of a comprehensive financial plan coordinated, the advisory team with the guidance of an objective advisor, such as a fee-only Certified Financial Advisor®, can provide the process, tools, and evidence for a successful retirement. Unfortunately, many approach the process and take a swat at what the goals and objectives might be. Next time, we will explore the setting of solid objectives. After all, garbage in, garbage out.