Every financial plan is wrong. They’re all shots in the dark. It’s impossible to predict the future, and there’s an almost infinite number of moving parts that will impact your financial life.
Also, even if you were to make the best predictions possible, your plan is out of date the instant you finish creating it. The world is constantly changing, and, at best, your financial plan is a snapshot of one possible way that you could reach the retirement you want.
But that doesn’t mean you shouldn’t have one. Think of your financial plan as a GPS. It’ll point you in the right direction, but you still have to keep your head up and watch your surroundings. By regularly checking and refining your plan, you can compensate for context, circumstances, and changes.
The goal of a financial plan is not to describe the exact path you actually take to retirement – it’s to help you figure out what you should be doing to get to retirement, and keep you on track.
You can’t control the tax code or how Congress deals with Social Security. You can’t just decide that you’ll make another $100 grand this year. And you can’t control what the financial markets are going to do.
You can only control your own actions.
So we estimate (and in the case of the financial markets, make wild – though hopefully informed and reasonable – guesses) what all of the external factors will look like through time.
But we have to recognize that these estimates will most likely end up being wrong.
Let’s use the stock market as an example. From 1927 to 2016, the S&P 500 Index had an average annual return of 11.95%. If we had to guess what the S&P’s return would be in a random year, we’d say 11.95% because that’s what the data shows us.
But we’d most likely end up being wrong. Over the 91 years from 1927-2016, the S&P 500 Index was only within two percentage points of its average return (9.95% – 13.95%) eight times.
We can use a number of techniques to account for all of the uncertainty swirling around your finances, but eventually all of that uncertainty collapses down to specific events, and we have to work with what actually ends up happening.
Maybe your company had a bad year because it lost a big client, or you brought in a big new contract.
Or maybe you decided that you really needed a boat (or, as people say, “a hole in the ocean that you shovel money into”)?
Did the markets have a year like 1933 where the S&P 500 Index was up 54%? Or did it have a year like 2008 where the S&P 500 Index was down 37%?
Whatever happens, you need to adjust your financial plan to account for it. There were very few (good) financial plans that looked the same before and after 2008.
Just like in boxing, your financial plan always works great until it gets punched in the mouth. What actually matters is how you adjust. You need to regularly review and revise your financial plan (but not too often) to make sure that whatever happens, you stay on track to have the retirement of your dreams.
 Data provided by Dimensional Fund Advisors. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.
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