When It Comes to Your Financial Plan, You Can’t Trust a Computer

Recently, during my annual physical exam, the doctor took my vital signs, reviewed my medical records and after reading my EKG results said, “Well the computer says you are having a heart attack. But the computer was wrong.

I’m in my early forties running marathons, and my heart rate is extremely low. So, after reading the ECG, the doctor got to work. She asked me several questions, reviewed past data and my medical history. After doing her research, she canceled the machine.

The same situation can apply to people looking to make a financial plan or revise their current plan. Without the right data and the right questions, even a financial plan that uses sophisticated software to create a financial model can give an answer that’s not the reality.

January is when many people review their portfolios and update their financial goals for the year. Due to the performance of the stock market in 2021, investors who own stocks have seen their net worth increase; some people are worth more today than ever. This can make their financial plan appear very strong or cause some to think that they don’t need to revise their plan for the coming year.

But has the next bear market factored into the plan? What about personal or family changes, like a move on the horizon, potential tax rate increases, or the prospect of buying that second home? All of these changes in life can have a major impact on a person’s financial strategy – questions an IT model is unlikely to ask.

When it comes to financial planning, the data entries are of crucial importance, as well as the answers to these questions. A financial advisor must ask a wide variety of questions for the model to work.

As you review your plan in January, here are some key questions and recommendations to consider.

Is your portfolio still properly invested to match your goals?

When making your financial plan, one goal is almost always to become financially independent and to retire comfortably. With the growth of the market in recent years, many people could reach this goal sooner than expected. However, the three years of strong positive stock market growth that we have experienced recently will not continue forever.

Investors should not assume that last year’s portfolio returns will be the norm going forward. Instead, they should rebalance their portfolios to build the appropriate level of stocks and bonds to match their retirement horizon. An overly aggressive portfolio can fall sharply in the next bear market, and retirement security can be sidetracked. Determine if your portfolio is being invested correctly for your retirement horizon.

What changed?

If you have a financial plan, assumptions have been made that may no longer hold true. Here are some examples:

• Were you thinking of buying a vacation home, only to now realize that your price must be much higher? The current real estate market continues to be hot, so buying or building costs are higher than you might have expected several years ago.
• Did you anticipate four years of college expenses for your children, one of which is now enrolling in medical school?
• Did you get a great promotion at work and now your income trajectory is skyrocketing?
• Will higher tax rates impact your plan?

All of these changes need to be taken into consideration, so that your plan continues to stay on course, while having a real sense of what your financial future looks like. An up-to-date financial plan can provide much more clarity when big financial decisions need to be made.

Who is counting on you for financial support?

Ten years ago, everyone in your family might have been healthy. Now there might be an aging parent who needs financial support to pay for health care costs. You may have a sibling with children who may not be able to afford school fees.

If this is the case and you are ready to help, study your options and work with a financial advisor to determine how much money is available to help your loved ones. And make sure you understand the impact on your personal retirement plan. Most computer models won’t ask you this type of question!

What are your life plans for retirement – and how much will they cost?

Many people have dreamed of taking advantage of retirement to travel the world. Now, if that hour has arrived, figure out how often you want to travel each year and how much it will cost you. Others are considering moving to a warmer climate in another state, which will involve the sale and purchase of a home, moving costs, and other expenses.

What is the cost of living in the state you plan to retire in compared to where you are now? What about state income taxes and property taxes? Housing expenses can eat away at your nest egg, so figure out the cost of those moves before making any big decisions.

Finally, what keeps you from sleeping at night?

When you ask customers this question, the answer isn’t always about the money. One response I hear often is, “I worry about looking after my parents and children while juggling my business.” Another common response is, “If something happens to me, does my partner know how to continue to manage the household?”

Sometimes it helps clients talk about these concerns and hear stories of how other people have handled similar life events. Financial advisers tend to have a diverse set of life experiences with different clients and may have an unbiased perspective to share.

Of course, money is a normal concern. “What if this bull market ends too soon or if we are heading for a major crash?” “” Do we have enough to cover our health care needs in retirement? This is where financial modeling, incorporating probability analysis, can provide peace of mind. Knowing that you have calculated the numbers and worked through various scenarios can help you sleep better at night.

Life does not run in a straight line. Taking the time to review and update your financial plan based on recent changes, as well as thinking about upcoming changes, is a good way to take control of your financial strategy. Use the new year as a time to complete your financial statement; ask yourself the right questions… and don’t just rely on a computer.