Hello once again, my friends, and welcome to the second of six installments in this guest blog series titled The Power of Planning. Here is the link to the last article, “The Power of Planning Series: Step One – Strong Foundations”. In that article, we discussed setting a solid foundation for your financial plan: how to do it, who to do it with and why it is important. Today we’re going to discuss the time period following the formation of your plan, meaning the time between the plan’s inception and what we call Pre-Retirement. We define Pre-Retirement as the 10 years prior to retirement. This could be a long stretch of time for some and shorter for others. Regardless, there are some things to take note of to ensure you make the most of your time.
First and foremost, always remember that one should consider their financial plan as an objective benchmark to which they can return in order to evaluate whether or not something is wise or ill-advised. If created wisely it is an amazing resource. Treat it accordingly.
Understand Oneself
I wanted to talk about this first being that to me, it is the most important part of this blog. Not getting a handle on this could potentially undermine everything that you do when creating and working a plan.
So what do I mean? How does this deserve a place in a financial planning blog? The simple answer is that no one else will be working your plan for you. You are responsible for its success or its failure to a great degree. Yes, you may have partners in the process such as a financial planner, broker or insurance agent. The point is that none of these partners can do what only you can do, and that is to adhere to the plan with diligence and discipline. It’s your money and your life and you are the final determinant. If you work it and work it well, you give yourself a great chance of success. If not…
We are emotional creatures. There’s no avoiding it. Some are more prone to allow their emotions to influence their decisions more than others. It will serve a person very well if they take the time to inventory how they make financial decisions to identify areas where emotions may play an outsized role. This could be when the market falls and they tend to panic and want to sell, or it could be when the market is booming and they want to take on inappropriate risk by buying everything in sight. I’m obviously exaggerating a bit but you get my point. The bottom line is that we are all influenced by our emotions to some degree and we need to have a handle on it so as to keep it from harming us financially.
There is a whole field of study called Behavioral Finance where experts try to understand investor psychology and how it affects the market. In other words, this is important stuff. Benjamin Graham (considered the father of value investing) is quoted as saying “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
So this section will touch briefly on some of the emotional pitfalls people fall into when trying to work their plan over a span of years, and how to avoid them.
Do you oversimplify an issue when you feel overwhelmed by its complexity? People that feel this way will often apply a general rule of thumb approach to decision making and while it may work out from time to time, I think we can all see where at the very least, it doesn’t lead to optimization. And that’s precisely what we are striving for with our financial plans…optimization. So if this is you and the thought of planning makes your head spin, either put in the requisite work to understand it before making a decision or fall back on the expert to whom you have delegated this area of your life: your financial planner (hopefully).
Do you tend to react on powerful emotions in your investing life? Do you sell when the market is falling and buy like crazy when it is heading north? Remember that when you created your plan, you established goals and you identified your risk tolerance. Manage your plan according to the objective criteria you used at its creation. Sure, if something you own is really not performing well, and after you have researched the underlying reasons extensively to make sure the drop is legitimate, you may have to make holding adjustments. But make it the exception rather than the rule.
Another piece of advice for these people, when things are good, imagine them being bad. This way you are experiencing the downturn in a place of security when you can think and process it rationally without emotions clouding your judgement. Too many times investors have bought and sold at exactly the wrong times because of their emotional reaction to loss or their greed for gain. The bottom line is, don’t allow your emotions to override all the work you’ve done with your plan.
Do you tend to want to spend now rather than save for later? This is a very common issue with most of us. Whether it’s because we just want to do what we want to do or there are real financial shortfalls where we have to decide between priorities, it all amounts to the same thing. As I said in my prior article, no amount of planning can make up for insufficient saving.
One of the ways we work with clients who struggle with this is to ask them to dream and imagine “What could be.” We have found that when clients allow themselves to really think about how they want their retirement to shape up, amazing things can happen. When they start to picture themselves doing whatever they want to do, being wherever they want to be and to visualize how they will be spending their money in the future, their staying power (more on this later) goes up exponentially and it is truly exciting to see. So use your imagination when you feel yourself falter and remember what it is your are trying to accomplish.
Do you struggle with feeling like you need to control circumstance and outcomes? This can be a big one when working with financial planners of any sort. As we saw in the last article, when people tap a professional like a financial planner, it’s because they understand at some level that they are in over their heads. Or it could be that it’s just that they don’t have the time or desire to put in the work needed to make financial planning successful. Whatever the reason, they have turned to someone else to whom they want to give some amount of authority over their financial lives.
My advice? Find the right person and do just that. Give them authority. Allow yourself to delegate this area to whom you have deemed worthy of your trust. Now, it shouldn’t be a blind trust of course. You should always understand what is happening with your finances. In fact, this is why education is such a major component in our relationship with all of our clients. If you’ve found the right advisor, this trust will come easier as time progresses.
These are just several behavioral pitfalls people encounter. There are many more. Honestly, too many for a single blog entry for sure. But if you get a handle on these, you’ll help position yourself for success.
Keep Your Eyes on the Horizon
Never forget that you have planned for the long haul. It might seem like present circumstance should trump the sacrifices necessary for a successful plan, but resist this with everything you have. We have witnessed too many times where a client decides that the unplanned-for present need of college education for their kids or a new car or house or whatever the ‘need’ might be at the moment takes precedence over the plan and it creates all sorts of issues when it comes time to transition to the next planning phase of life, pre-retirement.
Most of the time this can be addressed with a tweak or two to the plan, but it becomes a real problem when the advisors aren’t made aware of these types of departures. We then have to scramble to try to play ‘catch-up’ in some way. It works out in many cases but there have been a few times where the damage that was done was irreparable and a client’s retirement looked very different from how they desired.
So always keep the long-term nature of you partnership with you advisor and your plan in mind. When you first created the plan, there was a commitment on your end to see it through. Do yourself a huge favor and stick to it. Lean on your partners when you think you might be deviating and allow collaboration to rule the day. If you’re planning solo, keep your thoughts ordered and oriented on the long-term nature of your plan.
Monitor and Celebrate your Progress
While you are managing your emotions and keeping them in check, and keeping your perspective set on the goals identified in your plan, you will also want to monitor your plan and make any necessary adjustments. If you are working with an advisor, this should only be done in collaboration with him/her. Two heads are better than one in this case.
I know I have said that random changes to the plan are, generally speaking, a no-no. But I also don’t want our clients to be prisoners to the plan that is meant to give them comfort, peace and security. So when the time comes to meet with clients, there needs to be a balance. This is true for you solo fliers as well. Some consideration and sensitivity must be given to the fact that life happens and circumstances change. That’s the real world. Just keep in mind that the plan is your partner and it works for you, regardless of how you currently feel. You may find times when you resent the plan and that’s ok. Keep remembering all of the reasons you created it in the first place and give it its proper place in priority.
Regular touches to your plan are necessary if you want to ensure its success. For example, re-balancing your portfolio is something that should be done at least annually. At Touchstone, we actually do it every three months across our entire client base to make sure that portfolios are being invested appropriately. This certainly isn’t the norm in the industry but serves to make the point that managing and monitoring your financial plan is very important.
In addition, we meet with our clients at least annually, many times, much more often than that. However, this is a good starting point. You should plan on meeting with your advisor at least every 12 months to make sure that you are still on track. This helps to keep the two of you on the same page and allows for any needed corrections to the plan. If you don’t have an advisor, you will want to do this on your own. Schedule a date where you thoroughly review your plan, making sure to keep your emotions in check and your perspective on the horizon and so on.
Lastly, establish and celebrate milestones achieved in your plan. Allow yourself to see and experience the progress. This will go a long way in giving you the staying power I mentioned earlier in the article.
We went a little long today but I think we covered some ground that needed covered. I hope you will plan on joining me for my next installment titled The Power of Planning Series: Step Three – Locking it Down where we will be discussing the period of time directly leading up to retirement.
