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IS "INCOME" THE WRONG WORD?

Financial Planning

Why Words Matter...

Have you noticed how the choice of one word over another creates an emotional response? If you recognize this, you are not alone. Those looking for your attention test and measure how words impact your ability to choose. Whether the goal is viewership or sales, the choice of specific words is rarely an accident.

On Friday, the FBI Director revealed new emails relating to the probe of then Secretary of State Clinton’s use of a personal email server. While I have no desire to dig into details (or my opinion) of this finding, I do think it is worth reviewing the choice of words used when “reporting” the findings.

As I watched headlines, I noticed two words of similar meaning offering different emotional impact. The FBI memo used the word “review.” Other headlines quickly chose the word “reopen.” Arguably, the two words lead to a  similar outcome in this example. While both are probably correct, but when I think of “reviewing” new findings, I get a different feel than “reopening” a criminal case. But, this article is not about politics (I am so thankful for that) so let’s consider how words can affect your emotions and decisions when addressing your financial planning choices. There is one that I want to discuss.

Frequent Conversation

The week began with a conversation like so many over the past few years. A client focused on the word income. He questioned his ability to replace his income as he entered retirement. I explained there was another way (another word) to look at this question. I explained that when considering the big picture, whether your portfolio grows by $10,000 or provides income of $10,000 is of little difference. In either scenario, the portfolio increased by $10,000. Most importantly, the increase (assume sale of gain) can be used towards the most important measuring point…achieving your goals (travel, living expense). He acknowledged the logic in my statement, but he couldn’t help but to revert to “replacing income” which was an emotional response. Since day one of employment, we focused on current income rather than long term equity (or did we)?

Income is a measurement of today

When you think about it, income is today’s measurement of your current equity. While in the work force, your income is based on your human capital or equity rather than your portfolio value. It is based on your current knowledge and experience. While in the workforce, you are continuously building equity (at least I hope so) which is why your income rises. As we learn more through formal education (new degrees or designations) or experience (apprentice becomes master), we are building personal equity. I could also argue we are returning some of our equity every day.

Building Personal Equity

Consider another client who is expanding her knowledge – both through experience and formal education – she decided to enter a Nurse Practitioner program while continuing to serve patients in her nursing career.

Her “income” will likely increase as she continues to add to her equity. Her increased knowledge will be worth more, which will be measured in income. I could also stretch this example and argue she is returning some of her knowledge (equity) with every patient and coworker she shares ideas with and cares for. She is experiencing a return OF equity – her human or personal equity, but we don’t think of it that way (or at least I didn’t until this conversation). If we had, perhaps the transition from a return of personal equity in the workforce into the return of personal equity of retirement savings and investments might be a little easier on the emotions.

Entering Retirement

Let’s return to the original discussion. The client was concerned the “income” from the portfolio wasn’t going to cover his goals. At that point, I shared two important pieces of his plan. The two pieces that are common in most plans.

The first is what I shared earlier. In my opinion, funding his needs and wants is the key goal of his (and your) plan. In today’s environment (ultra-low interest rates), it is unlikely all his goals would be met via return ON equity. If plan projections remain favorable, it shouldn’t matter if a portion of goals are funded via a return OF equity. Technically, the growth may be preferred for tax reasons.

Second, most plans do not have a goal of leaving a large amount of equity at “the end.” In other words, the goal is to live a happy retirement based on the equity built while in your working years. But…emotionally we often want to see our portfolio balance stay the same or increase even when it doesn’t match our true goals.

Perhaps, if we recognized we were always returning some of our equity, this transition would be easier.

The best time to build equity

As I put the finishing touches on this week’s letter, I received a call from Stephanie. “You remember that I am singing in the choir at 11?” Yes, I remembered. As I hung up, I considered the amount of equity she was building today for which she isn't receiving direct income (I have no illusion she will be the next Taylor Swift – I wanted to say Stevie Nicks, but this is her story). But, she is increasing her equity.

Her two “things” right now are acting and singing (maybe that is one). She is getting ready to start her next play at Desert Stages Theater (Elf Jr.) From her initial performance, I recognized the benefit or equity she was gaining and how beneficial it will be in the future.

As part of a production, she is learning responsibility and teamwork. She gains comfort with speaking to a crowd and perhaps the most important and overlooked at the theater is that even when you do your best, sometimes things go wrong. Sometimes you forget a line or you turn left when you should have turned right. In most cases, the crowd doesn’t notice. The real lesson…you will make mistakes and you will move on.

These lessons build equity but don’t increase current income…it detracts from her parent’s income. Perhaps that is another good point. Building equity usually requires a contribution – money, time; usually both.

And talk about using the wrong words. I grew up playing sports. I never "did theater." So, I butcher everything. I refer to intermission as halftime. “Going to practice tonight?” Dad…it is rehearsal not practice…oops. Are you going to try out for the next play? You mean audition? Finally, who would tell someone to break a leg before stepping onto the ice rink? Poor Stephanie…she just rolls her eyes. Poor, uninformed dad.Lucky for her....mom gets it!

So, words matter

Although I realize this letter may be a play on words, I think it is important that we consider the words we use. When focusing on today’s income, we may sacrifice tomorrow’s goals for today’s emotional needs. If we focus on the wrong word, we may find the wrong solution. There are many “products” created that will scratch that itch.

As you move forward, I recommend focusing on the successful achievement of your goals rather than replacing income. Income is an important word in finance, but it shouldn’t be your only consideration.

As a side note, what words gain your focus that maybe shouldn’t? Go break legs!!!! Unless you are playing hockey…