Financial and retirement planning is hard. Don’t beat yourself up if you haven’t done everything you think you are supposed to be doing or fully understand every strategy you could consider for greater wealth and security.
Planning is hard for a variety of reasons. Let’s take a look at why and what to do about it:
1. A Financial Plan is Really Complex
When creating a financial plan for the future, there are a wide variety of interconnected levers. You can almost think of financial planning as playing a game of whack a mole. Well, wait that is way too simple. Financial planning is actually more like multi dimensional chess.
You make a minor change and it can have a cascading impact on a host of other factors over multiple time periods.
What to do about it
There are rules of thumb and frameworks (check out 4 steps to a meaningful retirement plan) that can help simplify things, but there is no point in hiding the fact that building a personalized financial plan requires really complex calculations (of both the mathematical and theoretical variety).
The NewRetirement Planner gives you full access to all of the levers that impact your plan. Playing with these factors can help you immediately see the big impact of seemingly minor changes. Don’t worry about creating the perfect plan, play with the levers (savings, income, taxes, longevity, economic factors, etc…) to learn how they interact with each other.
2. You Need More Financial Know How Than You Probably Have
If you want to feel responsible for your own financial future, there is a lot that might be useful to know that you probably haven’t mastered. And, the more you know, the more you realize what you don’t know.
The good news? If you are feeling overwhelmed, that could very well mean that you know more than most people.
Recently, on the NewRetirement Facebook group, a member lamented, “I am overwhelmed with terminology and the need for decisions I have no background for making. What is draw-down vs annuity, and how do you even begin to decide which to use? Should I care what Monte Carlo method NR uses? How do I wisely choose the input assumptions on the models I run? And where is there a basic glossary of terms?
What to do about it
The answer? Don’t worry! You don’t need to know everything. Just be open to learning. By building a plan, you are already much farther ahead and learning much faster than most people. Take baby steps and try not to get overwhelmed. And, start with a simple framework.
You don’t need to know them, but I’ll bet you still want the answers to the questions asked above. Here they are:
- Drawdown vs. Annuity? Which to use?: In the context of the question, these are both ways to create retirement income. Drawdowns refers to withdrawing from savings to meet your spending needs. This is different from purchasing an annuity (an insurance product) to guarantee income. They are both viable ways to create retirement income with pros and cons to each. Use the NewRetirement Planner to run a scenario to see if either is a good fit for your needs and values. (Or, explore other retirement income strategies and run “what if” scenarios that interest you.)
- Monte Carlo method: Monte Carlo is a way to vary investment returns to more accurately project the future value of your savings. There are different inputs and ways of calculating Monte Carlo. All are directional at best but better than guessing at future values. (An alternative to using Monte Carlo is to assign a long term average rate of return to your savings. This kind of linear projection is never going to be wholly accurate as investments don’t steadily march upward in a diagonal line. They go up and down which is what Monte Carlo is supposed to approximate.)
- Assumptions/Inputs: The NewRetirement Planner gives you full control over a range of assumptions: Social Security COLA, general inflation, medical cost inflation, rates of return and more. For these numbers, you want to use a long term average and not necessarily what the reality is today. It is reasonable to retain the defaults the system uses, but many people have varying opinions about what is going to happen in the future.
- Glossary: The Help Center is an excellent place to search for terms you don’t understand. You may also find answers in our blog (look for the magnifying lens in the navigation bar to search for terms). Can’t find an answer? Message us from the Planner.
3. Financial Planning Requires Us to Overcome Psychological Biases
Want to know why planning is so hard? It actually goes somewhat against human nature to build a financial plan for the future. Our brains just are not wired that way. There are probably hundreds of psychological reasons that make financial planning difficult for most people. Here are some of the most critical:
- Present bias: Many people tend to prioritize immediate gratification over long-term benefits. This can lead to overspending and undersaving, making it challenging to create a financial plan that aligns with long-term goals.
- Anchoring bias: Anchoring bias occurs when people rely too heavily on the first piece of information they receive. For example, if a person receives a pay raise, they may anchor their spending habits to their previous salary, making it challenging to adjust their budget and save more.
- Loss aversion: Loss aversion refers to the tendency to prioritize avoiding losses over achieving gains. This can lead to risk aversion and a reluctance to invest money, even if it is in their best interest in the long run.
How to overcome
Learn more about how to overcome your own psychology with 16 ways to outsmart your brain.
4. Planning Requires Discipline
Discipline is the ability to control one’s behavior and actions to achieve a specific goal or result. It involves making conscious decisions and taking deliberate actions that align with one’s goals, even when faced with distractions, obstacles, or temptations.
Many people prioritize immediate rewards over long-term benefits. This can make it challenging to adopt discipline because it often requires delaying gratification and making short-term sacrifices for long-term gain.
How to overcome
Set financial and retirement goals: Without a clear goal or purpose, it can be challenging to stay motivated and disciplined. Having a strong reason for why you want to commit to a plan can help you muster the discipline you need.
5. Money Can Be More Emotional than Mathematical
Money can be a source of stress and anxiety for many people. Emotional factors like fear, greed, and impulse can make it challenging to make rational financial decisions. This can lead to overspending, undersaving, or taking on too much debt.
How to overcome
First, acknowledge your emotions. By acknowledging and understanding your emotions, you can take steps to manage them.
It is also useful to have goals and a clear rational plan for achieving them. This can help you stay focused and motivated, even when emotional factors arise.
6. There Are a Lot of Competing Financial Theories and Strategies
For every financial truth, there is almost always an equally rational counterpoint. It can be incredibly confusing to know who to listen to and what advice to follow.
As an example, let’s take something simple about investing:
Widely accepted wisdom, buy low and sell high: There is no doubt that “buy low and sell high” is good advice. However, it is probably not the right advice for most people. Buy low and sell high is good advice if you you know how to do it. However, it takes a lot of expertise (and some luck and a big degree of risk) to get it right.
Counterpoint: Many financial experts will advise that a better investment strategy for most people is to buy at regular intervals – no matter the price of the investment. By investing a fixed amount of money at regular intervals, investors can reduce their exposure to market volatility. Rather than investing a lump sum at one point in time, dollar-cost averaging allows investors to spread out their investments over time, potentially reducing the impact of short-term market fluctuations.
How to overcome…
Remember that there are no right answers, only what is right for you. It is helpful to:
- Always be learning
- Be open, but skeptical
- Use tools like the NewRetirement Planner to try out different strategies in the context of your own financial situation
- Understand your own goals and values and filter view advice through that lens
7. Affordable and Reliable Support is Hard to Find
For many areas of our life, we can rely on friends and family for support and advice. Financial topics however are often taboo and casual financial tips from can’t always be trusted nor will they always be relevant.
Hiring a financial advisor can be expensive and, if the advisor is earning commissions, their motivations may not always be aligned with your interests.
There are some great books and web sites. And, we of course recommend the NewRetirement Planner and also NewRetirement Advisors for affordable fee-only financial advice. Collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from NewRetirement Advisors to identify and achieve your goals. Set up a FREE discovery session.
Creating a Financial Plan is Hard, but Possible
If you are aware of these challenges you can overcome them and create a solid financial plan that can deliver financial security and peace of mind.
