It was a cold evening in Washington State. John Hernandez just finished a long day at the office and was off to take a long bike ride after work to prepare for an upcoming triathlon. John’s life was perfectly normal. He was in perfect health, had a lovely wife, two children and a promising career as a flash developer for a well-respected firm in Seattle. His wife also was a computer programmer and together they purchased their dream home to raise their family. He fit perfectly into the financial planning model. Buy a home, maximize your 401(k), and save for retirement. He did everything right. As he travelled down 124th Avenue, a white van driven by an uninsured motorist made an illegal turn, hit John broadside and crushed his spine. Two days later he was dead.
I tell this hypothetical story of John to highlight one major flaw in retirement planning that makes the entire process almost irrelevant. Our life is dictated by the unpredictable, the uncontrollable and the unimaginable. Some of these events are good (like JK Rowling going from near homelessness to selling over a hundred million books) and some of these are bad (like John’s death), but they share something in common; they have extreme financial consequences.
So what does this have to do with retirement planning?
Outliers don’t fit nicely into the mathematical models used by financial planners. We all seek certainty and financial planners are happy to placate us. I love the 10-day weather forecast. The forecasts for the following weekend never turn out to be remotely close to what was predicted. My logical brain knows it is a complete waste of time, but I still want to know. A failed weather prediction for my camping trip is for the most part harmless. But what about a retirement prediction? The typical retirement plan forecasts make an assumption for just about everything. Inflation rates, tax rates, spending patterns, stock market returns, and what your life will look like 20 years from today. These financial plans are accompanied by pretty charts, cool projections and simple solutions all of which creates the illusion of certainty. It makes you think if I do this, I will get that. Wrong. If only life were that simple. The challenge with retirement planning that turn out wrong – you cannot make up for the lost time. By the time you figure out the mistake, it is too late.
To test the absurdity of the current retirement planning model, I want you to take a stack of note cards and make one 5-year prediction per note card. What will you be doing? Where will you be living? Will you be married? What will interest rates be? Where will the stock market be? Will the company you work for be around? Will the US be around? What will a dollar buy? Add your own questions to the list. The more the better. Now seal the cards in an envelope and lock them away for 5 years. When you unseal that envelope, how accurate do you think your predictions will be? The answers to these questions will have an enormous financial impact on what your retirement will look like and you can’t predict a one of them. Life has more to do with what we don’t know, and you have to get comfortable with this fact.
So what do you do? One of our clients sailed from the Cape Verde Islands to Barbados. He knew the destination but the path was uncertain. Each day of their journey, they worked with what life gave them. They were hypersensitive to the winds, the ocean currents, the storms on the horizon and the massive floating debris fields, any of which could ruin the journey. They did not put the boat on auto-pilot and hope for a successful outcome. They worried about how to get each day right. Each day they focused on maximizing opportunities, limiting failure, and most importantly adapting quickly to each new situation. The collective single day victories turned into a successful outcome. People that retire well get today right. Retirement is a by-product of a successful journey. Focus on getting today right and you increase your odds of a successful outcome. Don’t plan for retirement; plan for today.