Finding the truth should be easy. The truth has only one version. Ironically, if the truth were the only option, we probably wouldn’t need courts. Reality is there is the truth often “becomes” the most believable story or the story we want to hear. The term “fake news” is used by politicians (both sides) to explain the difference between their version of the truth and the other’s version of the truth. This phenomenon isn’t new. The change is the titling of an opinion as fake news and perhaps the amount of opinion readily available.
There is technically one truth. There are multiple opinions. Some of the opinions are biased with an agenda. Others feed a desire to affirm the opinion of the writer/speaker with their audience. Just like politics, we should be aware of the truths and the opinions when considering financial choices.
Most financial choices have a truth. That same choice often has many opinions. Sometimes the varying opinion is based on the unknown future.
Challenging an existing assumption is a helpful exercise. The desire to steer opinion towards a pre-determined outcome based on bias or desire “to sell” creates is an unwelcome challenge in the financial planning process. We begin with a review of the truth and common opinions surrounding the first two steps in what I call a well-written financial plan.
Why don’t we simply focus on the truth?
A common example of storytelling around a set of facts plays out daily in courtrooms. When it comes to trials, I would argue the truth is the starting point (at best). The “winner” is often the one who told the best story. When counseling divorcing couples, I remind them of this truth. If they choose to go to trial, the judge will determine their outcome based on the story being told (hopefully backed up with a version of the truth).
Before trial, both spouses believe their story is more credible. They both believe their interpretation of the truth. But, one won’t be right, one will “win.” Rather than focus on a winner take all solution, perhaps a compromise would be better. There are arguably few decisions as emotionally fueled as divorce, but divorce is not the only time we make financial decisions based on emotions, sometimes with winner take all outcomes.
Emotions drive stories
Whether discussing politics or finance, emotions have a significant impact on our interpretation of the truth. We often seek the story that best fits our current beliefs. The most common emotional decision is the question of whether to carry a mortgage into retirement.
The truth…if you pay off the mortgage, you replace one asset with another (investment/saving for real estate). The opinions surrounding that decision are numerous with potential bias. Deciding what is best for your situation requires an open mind and inclusion of various considerations. In this case, there is a number answer (based on an assumption of the future) and an emotional one.
While writing this article, I came across perhaps the perfect headline to describe the emotion and desire to hear what we want to hear. The email subject read… “Diet for lazy people.” Talk about a story people want to believe! It shouldn’t surprise you two of the biggest marketing niches are finance and health. People want to be rich and healthy (with varying definitions). Many prefer quick results and if possible…little effort. This desire writes many stories (and sells many products).
The best story for becoming rich with minimal effort is the lottery. It is estimated people spent over $73 billion on lottery tickets in 2016. We know the truth. The odds are heavily against us. But, it is only a couple of bucks and after all…someone wins.
In case you were wondering…no, I did not open the “Diet for lazy people” article and yes, I buy lottery tickets from time to time as I get my morning “Diet Coke fix” at QT. Lots of potential opinions in that statement.
Fulfilling our retirement desire
The desire to retire is the most common financial planning goal. There are many decisions that impact a person’s ability to retire. There is a truth to achieving this desire. The truth is if you want to spend more than your guaranteed income (Social Security), you must offset some pleasure (spending) today.
This truth is boring. It does not provide a quick fix. But, that doesn’t keep people from selling “get rich quick” solutions. There isn’t a magic button that erases past behaviors. The good news is there is a simple solution for those who seek it and it is not…” Retirement for lazy people.”
Financial planning truths (and the stories)
Retirement truth is simple. You earn, you save, you invest, you protect, and ultimately spend. Each step has a truth…and stories (some too good to be true).
We begin with earning. For those born without a substantial trust fund, the first truth is that we need to earn money. Without earnings, the next steps become moot and, in most cases, impossible. The truth is current income determines both your current lifestyle and potentially your future lifestyle. How it impacts your future lifestyle is dependent on the next step…saving.
The Fire movement
There is a recent movement called the “Fire Movement.” It is short for “Financial Independence, Retire Early.” Basically, the gist is…sacrifice now (save a lot today), retire sooner (enjoy the time and sacrifice later). If you worked multiple jobs or overtime or climbed the corporate ladder as fast as you can, and saved most of your earnings, you could retire earlier. But, at what cost? More importantly, is that your ideal plan?
A well-written plan allows you to enjoy (spend) today while saving for your future expenses. If your plan projects success based on a certain amount of saving, you could spend the rest without the negative story. Too many become so worried about whether they are saving enough for retirement, they struggle with enjoying today. Finding balance is a better story for most.
Without earnings (or another source of income), we can’t move to saving. In the extreme, you may have the best investment solution, but with no savings…no return. The obvious question about saving is how much? And here again, stories tend to focus on fear.
I won’t have enough to retire so why bother?
Fear-based stories say you don’t have enough and, in some cases, they say you never will. When this occurs, a common response is to give up on the idea of retirement planning. “I won’t have enough so why bother?” On October 3rd another example found its way onto the Yahoo Finance page.
In reference to a question about the Fire Movement, Suze Orman shared her opinion of the savings number needed. On the Afford Anything podcast, Ms. Orman said… “Listen everybody. I know you want to retire at 25. At 30. At 35. But…as you get older, things happen.” The interviewer asked…what things?
“You get hit by a car. You fall down on the ice. You get sick. You get cancer.” “If a catastrophe happens, if something goes wrong, what are you going to do? You are going to burn alive.”
“Listen, if you have 20, 30, 50 0r 100 million dollars, be like me, OK?” “If you have that kind of money and you want to retire, fine.” The podcast host asked what level of wealth would be necessary.
“You need at least $5 million, or $6 million…really you might need $10 million.”
Most people that work with us are not looking to retire by age 35, but the story raises questions for those looking to retire at age 55, 60 or 65. Is it any wonder people struggle with their story of retirement?
By the way, the article lists her net worth at $30 million…probably a large portion came from selling advice. And wouldn’t the scenarios listed above also say you should seek balance because we don’t know when “our plan will end?”
Stephanie’s truth and stories
I realize it has been a while since I have posted. The simplest version of the truth surrounding Steph is that she is growing up too quickly (my opinion…she would say she is doing just fine). She tried volleyball and has shifted her attention there. This means I had to learn volleyball as I am now coaching two teams. We are undefeated with two games left in the season. I think it is the coaching…she thinks the credit belongs to the players. We can agree to disagree!
She turned 12 last week. I try to think back to what I wanted for my 12th birthday. Probably hockey or another sports equipment. I know I didn’t want an iPhone (for obvious reasons).
I remind myself of the truths of my childhood are not the same as hers. We often hear of stories about the differences between children in our generation versus hers. Yes, we were outside more often. We rode our bikes everywhere. We didn’t wear bike helmets (or seatbelts). But that was a different time.
She probably looks at my truth as my story, not hers. Her truth is and will be different.
The first two steps of a well-written financial plan
There is a simple truth when considering retirement (and other financial goals). You earn money that is saved and invested to meet future obligations. This is rarely challenged. Income and saving are the first two components of a financial plan. When they are in place, your plan moves to the next steps. The truth in these first steps does not “sell” products that earn commission or asset management fees and therefore receive less attention than the solutions addressing the next steps.
Next week we move on to the next two steps of a well-written plan. As we move further along the planning process, we will see an increase in stories and opinions. We will expand on the mortgage consideration question. We will review the stories behind the protection of assets. Finally, we review the truths and stories (often biased) surrounding investment solutions.The most important truth is that your plan serves you. Seeking the truth and challenging default beliefs will help you build your best plan. If you know someone who might need help with their plan, please share this article with them.