A question we get all the time in one form or another is: “How should my money be invested?”
It sounds like a straightforward question. The problem is, we really can’t answer it intelligently without knowing quite a bit more.
In this week’s episode of Wisdom for Your Wisdom Years, Matt Reynolds and I continue our Inside the Planning Room series and walk through what happens before we ever get to an investment recommendation.
We used a hypothetical example of two 67-year-olds who each have $2 million invested.
One needs $100,000 a year from the portfolio to support their lifestyle. The other has Social Security, a pension and rental income and barely needs to touch the portfolio.
Same age. Same amount of money.
But the money has two very different jobs.
That distinction is really the starting point for the way we think about planning.
Before making recommendations, we collect the information that tells us what is actually going on: income, expenses, taxes, investments, mortgages, Social Security, goals and the things clients expect may change over the next several years.
Then we build a baseline.
I think of it a little like going to the doctor. Before the doctor starts telling you what to do, somebody usually takes your blood pressure, weight, heart rate and other basic information. You need to know where you're starting.
Financial planning isn't much different.
From there, we start changing things.
What if you retire earlier? What if you spend more? What if you move? What if long-term care becomes necessary? What happens if Social Security starts at one age versus another? What happens when the market doesn't cooperate?
We're not doing that because we think a financial planning program can predict somebody's life 30 years from now. It can't.
What we're trying to understand is which assumptions really matter and how much room the plan has when things don't go exactly as expected.
Only after we understand that does the portfolio discussion really make sense.
And even then, there's another layer.
The amount of investment risk the math says somebody can take isn't necessarily the amount they should take.
A client might have the financial capacity for a fairly aggressive portfolio, but if a bad market causes them to abandon the strategy, that matters. It's a little like giving someone who hasn't exercised in years a workout plan requiring them to go to the gym six days a week. It may look great on paper. That doesn't make it a good plan for that person.
Different accounts can have different jobs, too. Money that may be needed next year doesn't necessarily need to be invested the same way as a Roth account that may not be touched for another 20 years.
All of this is why I keep coming back to one line from this episode: The portfolio serves the plan. The plan doesn't serve the portfolio.
Financial planning is much more of a process than a document. The investment recommendation is one result of that process, not the place where the process begins.
