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Focus on the Right Question

As the house debated whether to bring the new Health Care Bill to the floor on Thursday (and Friday), I was asked a very interesting question…” are we focusing on the right problem?” It may have been phrased differently, but I think the point is dead on. When considering how to cover the costs of health care, should we focus on why the cost of insurance is high or should we focus on why the cost of care is high? The follow up question was “why aren’t we talking about the real issue…the high and increasing cost of health care?”

As our conversation continued, she shared that our healthcare is higher than many other developed countries. “If we addressed the cost of health care, wouldn’t insurance premiums go down?” I did a search to confirm her comment. Based on what I saw, she has a point…but I am also aware that not everything on the internet is fact checked and is subject to a biased viewpoint. Research is clear about one thing…health care costs are rising at a rate significantly greater than other costs. So I ask, are we looking at the wrong question?

I don’t have answers for the current health care debate, but as I questioned whether we are focused on the right question concerning health care, I thought it would be worth considering the key focus points of a financial plan.

Two Categories of Health Care?

I simplify the need for health care into two categories. The first is the care needed when you are relatively healthy. This would include preventative and regularly scheduled checkups. I suppose this would also include times when a health care provider notices something “irregular” and requests more information and recommends adjustments to your health plan. The second is what I might call detailed or catastrophic (some cases) care. You are likely in the hospital or other care facility. This is probably an oversimplification.

Two phases of financial planning

Financial planning has two key phases. The first is the accumulation phase…how you prepare for retirement. Like the first stage of health care, most understand what they should do during this phase; this doesn’t mean they do it.

Simple Solutions 

Most recognize the health benefits of exercise and diet. The research is clear when it comes to smoking and fake foods. Yet, many of us choose to ignore the proven solutions. This is true when it comes to the accumulation phase. I am pretty sure most understand the prescribed steps for building wealth. You earn, save, invest and protect…simple. But just like knowing you should eat well and exercise doesn’t guarantee compliance. Especially, when there are conflicting beliefs of what constitutes “eating well” or which tool to use when saving for retirement.

If you project a shortfall as you consider retirement (or other goals), the prescription is easy because the rules are simple. If lacking enough to retire…add more. This is like being told… “eat healthy.” What does “eat healthy” mean? A quick search for eating healthy or best diet will leave you with more questions than answers and when the choice becomes too difficult, we tend to ignore it all together and revert to our old patterns.

When a plan doesn’t project the desired probability of success, solutions include spending less/saving more (investing the difference); earn more (through investments or income); work longer or die earlier (not a popular solution). All are easy to understand and for the most part easy to model. The results are easy to see.

Like the idea of idea of eating better, the recommendations in this phase are obvious…even if we choose not to follow.

Solutions for the decumulator 

The answers aren’t as simple when we (or a loved one) is facing the second phase of health care. The emotions, primarily fear, of the unknown take hold.

Like the second phase of health care, the decumulation phase of a financial plan can be confusing and emotionally guided. Some share they never expected to “here.” Retirement always seemed a distant goal and yet…here you are. The easy answer for someone who projects success (or more) in the decumulation phase is to “spend.” After all, this is why you saved during the accumulation years…right?

The decumulation phase is a lot like the second phase of health care. You aren’t sure what to expect. Perhaps you followed your parents path during accumulation (or did the exact opposite), but now that you approach retirement…you don’t want to “retire” like your parents did. The rules you learned (maybe) don’t seem to apply any longer. Lots of people share advice on how to get to retirement, but few share what to do when you get there. Adding to the complexity is the varied definitions of “successful retirement.”

Balancing the Conflict  

I spend a lot of time helping clients balance the two phases of financial planning. Perhaps better said, I spend a significant amount of time balancing the emotions of the two phases of financial planning. Why can’t we go back to the easy solution? Like the days where you could eat anything and everything you wanted without gaining weight (the good old days).

You may find it difficult to transition into spending, rather than saving. The struggle isn’t necessarily a lack of understanding or even believing you’ll be OK if you spend more. Instead, the conflict is internal. After 30 plus years being told to save and grow your portfolio, it can be difficult to spend more and watch the portfolio decrease in value, even with the acknowledgement that this is your goal.

The fear of spending is not reserved for those in retirement. Many struggle to spend more (take vacation or help children) while in the accumulation phase. While a financial plan won’t remove the emotions, it will show a projection. If you agree with the inputs, you should agree with the projections because the results are simple math. But, you can’t help thinking about what I call an outlier.

The outliers

We’ve all heard of medical outliers. A man who runs daily sees his doctor every year. Every test reveals picture perfect health. He dies suddenly of a heart attack. A woman who smokes two packs of cigarettes a day; has elevated cholesterol levels and a heart “condition” lives to age 102. Of course, outliers fall on both sides. Another man who exercised daily lived to age 102. A different woman who smoked a pack of cigarettes a day died at age 68.

Financial outliers include surprise expenses (usually medical), living too long, poor market returns, bad timing of market returns (different) and other unknowns. We hear of the person who lived what most would consider a “conservative financial life” dying with a million-dollar bank balance. Outliers make for good headlines, but most scenarios fall within an expected range.

Let’s focus on what matters

Choices are rarely as simple as the simple “prescription.” In a perfect world, we eat only the right foods (in proper portions). We exercise regularly. We are visions of perfect health.

We save just the right amount for retirement and future goals while maximizing our life experiences today. And then…we get real! Life throws us curve balls. We plan to get to the gym, but a new deadline approaches so we can’t take time for a proper lunch. The fast food joint around the corner will be quick and I’ll get to the gym tomorrow. That’s the problem, we don’t live in a perfect world.

I once heard the best diet is the one you will follow. That is a good starting point. Let’s begin with where you are. Let’s consider what got you here. Then let’s look forward.

Given that I am finishing my 52-ounce Diet Coke (yes, the EXTRA large), I am likely not the one to give health advice, but I will share some common themes from the financial plans I have written and reviewed.

Start with what is important to you. Try to focus on what is truly important to you, not what others say should be important. Recently, I reviewed a plan in which a couple debated whether to help their child with a recent expense. They weren’t happy (to say it mildly) about what caused the expense. They debated whether helping the child would help or enable future bad behavior. Is relieving the financial burden more important or is teaching a lesson the goal? I suppose most parents struggle with this balance at times.

A common planning consideration is the ability to travel while remaining physically able to enjoy. Is the desire for travel now worth a possible decrease in living expenses later?

Is it important to retire together? This was a new one for me. The thought was that if one retired a couple of years before the other, they may get used to their schedule and the second to retire would be a shock to their “system.” Interesting thought…I hadn’t thought of that, but I suppose there is some truth to that.

In the end, we have two factors when considering a “successful financial life.” We have time. We can explore life’s experiences. Or, we have money with which we can enjoy today’s “goods” and protect for the unknown of tomorrow. In most cases, we are trading one for the other.

 When you know, what matters most, we can test results…there is an app for that! We can test the likely impact of an extended long term care need. We can project how retiring one year earlier so you can enjoy that trip you always dreamed about affects your plan. My job is to share the results, ask questions and provide unbiased feedback. Your job is to consider what your “successful financial life” looks like.

Steph’s Focus

For the most part, it seems that Steph’s focus is on a tablet or computer screen (You Tube and Roblox). I wonder if my parents questioned my focus when watching Gilligan’s Island. Probably not my best use of time.

As mentioned earlier, we don’t always do what we “know” is best for us. I imagine she understands reading the book with the report due is a better choice than watching a You Tube video about hair bows and making homemade slime (not the same video). But, just like I like should be drinking water instead of Diet Coke…

Dust yourself off…

We are in the final stretch of the Little Mermaid production. She plays Flotsom one more time (next Saturday) and then we move onto her next adventure (School of Rock). I may have shared that she skates on Heeleys (the shoes with a skate inside) to give the illusion of sliding through the sea.

Yesterday the inevitable happened…she fell. I would like to say she wasn’t focused because that would fit better with the theme of the post, but I know the floor isn’t smooth in spots and I think she simply caught an edge. She got right up and continued.

At the end of the show, I walked out to meet the cast. She was in good spirits and laughed that it was bound to happen. “Don’t worry…no one noticed.” “Really? The entire audience went…OHHH.” “OK. Maybe a few people noticed. Want to see it again?” “Please tell me you don’t have it on tape.” Her friends gathered around…

When she began performing, I recognized the benefits of public speaking, learning lines, being responsible to more than just herself. I also began to realize one of the greatest benefits of theater…she make a mistake in front of 120 people and the world didn’t come crashing down. She probably wanted to lay there for a minute and heal her pride, but she didn’t. She fell right back in line.

 Besides…she told me you can’t cry with fake eyelashes. I made a note.

Where is your focus? Where should it be?

As I wrap up this week’s post, I ask you…where is your financial focus? Is it where it should be? We can’t control your health or financial future with certainty. But, we know the steps that have consistently provided a high level of success.

Even when we are focused, sometimes we fall. It happens. Our job is to get back up and rejoin the performance.

 One final point for this week. I wonder what the White House is focused on after this week’s result. A good outcome is the realization that being President is about negotiation. Hopefully, the past set back leads to a President and Congress that learns to work together. The bickering has lasted far too long (on both sides). Unfortunately, I am not sure either side is ready to “play nice.” A bad outcome would be if the markets lose faith in the promises of the campaign trail. The next hurdle is tax reform. Wall Street will be watching closely…as will we.

Hi. I write and distribute a letter like this one every week. In the letter, I share thoughts about financial planning and often include opinions or experiences from my 10-year old daughter...Stephanie. If you would like to be added to the distribution list (I am sure you don't get enough emails already)...please send me your email address. I will happily add you. Thanks. 

Email: bob@disciplinedmoney.com

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