Why a good financial plan is always wrong

And why you need one anyway.


“Every financial plan is wrong. They’re all shots in the dark. It’s impossible to predict the future, and there’s an almost infinite number of moving parts that will impact your financial life.”  –Bob French, at theretirementresearcher.com website

Why do we avoid things that could be really valuable but that also could be scary, or disappointing? Because we are human. And life is unpredictable.

People often hear that they need a financial plan if they want to reach their goals for retirement and a host of other financial needs. And most people should have a clear plan on how to get to where they think they want to go, but things keep them from acting on this. Cost, discomfort with the sharing of intimate financial information, and general skepticism of all things associated with Wall Street. And this is understandable.

To make matters worse, I’ll throw this other log on the fire: Even the best financial plan is just gonna be wrong.

Generally speaking a comprehensive financial plan will look at your assets/savings, your liabilities, savings rate, expected retirement date, and estimates on how much income you want or need. While this is a distinct simplification of the process, the results of the planning then offers an estimate of what your odds are of reaching your goals. But this is just a picture of the present, coupled with reasonable assumptions about what the outcome could look like. As noted a lot of things can happen that change that outlook.

What kind of things? The market returns that were estimated were lower. You have health issues which make an early retirement unavoidable and unwelcome. Inflation is higher, your expenses are greater, or your child wants to be a doctor.

They could also change in a good way. Returns are higher, inflation is lower, you were able to save more than anticipated, and your child is a prodigy, as it turns out, and will pay nothing for her education.

Perhaps the point is that a good financial plan is like a compass. It allows you to see generally where you are headed, albeit imprecisely, and allows you to adjust for unforeseen challenges that may shift your path. Like a mountain or a lake, or a loved one who becomes seriously ill.

So while the original planning gave you a view that your odds were great, good, or poor, by updating that plan you now have a framework to make any adjustments that the new information suggests. Chances are it changed. It’s by this updating process that your plan becomes a feedback loop. And this is imperative because that feedback loop informs you again what you should be trying to do.

You also get some valuable intangible things. Things like “I actually got a grip on this, and it wasn’t as bad as I thought, and I feel good about that,” or “I now understand better what I can do and also what I probably can’t change, so it’s good to know what my reality is.” How we look at our lives and what we are doing is worth a lot. It’s not actually about money in the end. It’s how we view ourselves and our lives.

I recently spoke to an old acquaintance about planning and investments. He had already engaged a financial advisor, but the conversation was still valuable. He was the type of person most advisors would love to work with: His situation had become more complex over time, and he knew he couldn’t address it without experienced help, he had accumulated good assets, and he had a realistic outlook about what to expect from an advisor, and what he might get as results. I commended him on his grasp of the important things he just mentioned.

Then he said something something perfectly simple and very important. To paraphrase, “Using these services has a cost, but I just think that the risk of not using them will probably cost me a lot more.” And he’s right. In that sense, it is like insurance that keeps us from financial harm. Regardless of your thoughts on insurance, there is an old adage about insurance that goes, “Insurance is only expensive when you need it and don’t have it.” And that’s the truth. There is value in having a safety net when things go wrong.

So what does this last bit have to do with where we started? Simply that having a plan and getting professional help will in all likelihood be a cost-effective pursuit even if we don’t get precisely what we are shooting for. The value is in our ability to clearly see what choices we have, and what can be done. What we gained is an ability, in real time, to reassess our plans and make logical changes if they are available. That not doing something leaves people in a less secure place. Changes will always happen, and not having a plan on how to adapt leaves us in a vulnerable place. The real value of a plan is in having a system to address and adapt to change. So please consider creating a sound financial plan, even if we accept up front it will be imperfect. It will allow you to stay on the road in front of you.

John Kageleiry is a business writer and financial planner. Have a question for “Finance 101”? Email it to jkageleiry1@gmail.com.