Your Retirement Plan Could Be Seriously Flawed

rolling-diceMy Comments: I’ve been talking about retirement with clients for the past 30 years. From day one I’ve stressed that I have no idea what I’m having for supper tonight, much less how much money they will need 30 years from now.

We can make projections and predictions until the cows come home but it’s just a guessing game to help a client feel better about their future. The best scenario is when you know the critical questions to ask yourself, follow the priority you have assigned to the answers you get, and hope for the best.

Tim Van Pelt – September 30, 2015

My industry, the business of providing financial advice, should be ashamed of itself. We’re supposed to be professionals versed in the knowledge of investments, financial markets, retirement planning, and the mathematical fundamentals behind that subject matter.

We are regulated up the you-know-what. Yet, we are still allowed to provide you guidance and information that we know (or should know) with virtual certainty will be completely wrong, and we don’t tell you that.

Have you ever had one of those retirement projections done for you where a fancy software program spits out a 10-, 20-, or 30-page report full of neat-looking graphs and tables of your investments and ultimately comes to the conclusion that you will be “A-OK” in retirement?

I am going to show you today why those reports are likely more useful as fire starters than as guides for your retirement.

The problem lies in several factors:
1. modeling with averages rather than accounting for sequence of returns and actual volatility,
2. the use of average market returns that are too high,
3. advisors typing inputs into the software without understanding the mathematical principles and limitations behind the models, and
4. advisors not adequately communicating to you the “fine print” — i.e., the inherit limitations and flaws of the models.

Instead, you are presented with a fancy and professional-looking report that gets treated like gospel because of its appearance. (As a wise uncle used to tell me, “Appearance often matters more than reality in business.”)