Financial planning is based on estimates & projections. It’s educated & data-driven guesswork. The return projection numbers are so precise that they run to two decimal places. Reality is not that predictable! Planning projections for equities have been about 6.5%, give or take, for the past few years. On a year by year basis, it’s been way off. Markets have done far better. They could have done far worse. But the projections generally work well, when considering average returns, over longer timelines. After the exceptional market returns of the 90s, a financial plan using 6.5% for projections might have been considered too conservative. But a 50/50 mix of the US & Canada would have returned an average of almost 8% annually, from 2000 up to today. Looking back, that 6.5% wouldn’t have been a bad number to create a plan with in 1999, eh? But things can get crazy over shorter time horizons. Especially when retirement withdrawals come into play.

Grumpy old guys & gals who retired in the last 10 or 15 years complain about not being able to draw down their big RRIF accounts fast enough. Their portfolios are growing faster than they can spend them down. While many of these retirees are probably brilliant investors, some just got lucky! They timed the start date of their retirement pretty much perfectly. The 50:50 US & Canada portfolio would have returned almost 12% annually since 2010. Almost double that 6.5% planning number. Now there’s nothing wrong with being lucky. But luck is not always good enough for retirement planning.

That same 50:50 portfolio would only have returned a little more than 2% annually from 2000 to 2009. An investor who went all in on the American market over that decade would have had a negative return. The US market lost money over that 10 year period. And that’s without withdrawing any retirement income from it. The really big question with financial planning going forward, especially for new or imminent retirees, is this … what will the next few years be like? Those early retirement years can matter. A lot. As we saw above, average return numbers work really well over the long haul. But a severe or protracted downturn in early retirement, like the 2000 to 2009 period, can make a real mess of a plan. Taking a big hit immediately after retirement can seriously impair income for all the years that follow. The message here is that we cannot assume that the high returns of recent years will continue. Planning must allow for these different outcomes.

Financial planning guidelines have to thread a needle with respect for a wide range of potential returns. And it’s wise to err a little on the conservative side of what the long term data say. Many recent retirees, & new financial advisors, have not experienced something like the lost decade back in the early 2000s. To varying extents, we are all influenced by recency bias. And recently, things have been great. But we may need to temper the optimism & plan a little more cautiously for the future. Especially if retirement is imminent. Despite our retired friend’s success over the past 5 or 10 years, thinking we can begin retirement & spend at a consistent 10% rate is very risky.

So if planning is just guesswork, should we ignore it? Absolutely not! Nobody can foretell what happens next, but that makes having a plan even more critical. The purpose is to figure out how to best use our money so that we can pay the rent & buy groceries all the way to the end. Plans include success rate estimates & simulations that show if the plan can survive the best & the worst combinations of market cycles.  Plans can include fun things like bucket list travel & fancy cars. Along with some things we hope aren’t needed, like illness or meeting long term care needs. It’s important to have a plan that considers the many vagaries of retirement. It’s equally important to have regular plan reviews & revisions over the years to ensure things stay on track.

Getting a financial plan done professionally can be very expensive. If you are paying an advisor to manage your retirement, financial planning may, indeed probably should, be included as part of that service. A good financial plan is a crucial part of living a successful retirement. Even for those DIY folk with a good knowledge of what’s required, having another set of eyes review the plan may still make sense. Indeed, it may be worth having a plan done by more than just one professional advisor. I know, sorry!

DIY folk tend to be frugal by nature & some may not want to pay for a professional plan. I get that. But you could ask about getting a review of your DIY plan, or a freebie, or a demo plan from whatever institution you have your money at. Some financial institutions provide that service. Sometimes you just need to ask. Fortunately, more & more planning tools are becoming available for the DIY cohort nowadays. Maybe with AI, we’ll even get some apps for that! But until that perfect app arrives, & perhaps even afterwards, getting a professional financial plan done might matter for most of us. Planning, especially for retirement spending, is quite complex. If you are not using a professional to put a plan together, there are some tools available that may help. Check out some of the tools in this post DIY Financial Planning … An Update. I have used the Adviice platform mentioned there & there are others like Optiml & MayRetire that I haven’t played with yet. Doing our own planning on a spreadsheet usually carries a greater risk of error. Whereas these platforms are getting feedback from a wider public audience, which helps weed out the errors & improve the product over time. Some of them have an access path to professional planning services. It’s great to see tools coming onto the market for DIY financial planning. As they improve & get smarter, perhaps they’ll help the profession space to offer more competitive services too. But until that happens, we’re stuck paying more. And despite the high price, it’s worth the spend if it helps us avoid a bad outcome.

If you want to learn more about saving & investing, please check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.