The Most Important Variable of Financial Planning is the Date of Death
The most common question I get asked when I tell people I’m a financial planner is, “what stock do you think is the next one to go big?’. Even if I had a well scripted answer, the information would be useless without a greater understanding of what the person is asking me. I have my thoughts on what the markets will do, but even if I could see into the future and know with certainty whether a stock was going up or down, recommending it to the person asking my opinion may not be appropriate. I know very little about this person besides his/her interest in investing.
There are many important factors I consider when determining what is the right investment for a portfolio. Time horizon, risk tolerance and tax consequences are among the most universal. And while some variables are easier to control than others, they are all unpredictable and none have guaranteed results.
Furthermore, if I was given the choice of what variable I could predict with 100% certainty it would not be market return, or future tax brackets or anything relating to numbers. If I had to choose one variable to keep constant I would absolutely want to know the date all of my clients will pass away.
While it might seem morbid, longevity risk (or lack of longevity) is the key factor to the success or failure of a financial plan. Knowing how long someone will live would make it easy to determine how much can be spent on an annual basis in retirement. More importantly this knowledge makes it easy to determine how much to save during accumulation years.
Insurance planning would also be easy if I knew who would pass on prematurely and what their financial responsibilities would be on that date. Knowing the date of death would make my job so easy that writing a financial plan would take minutes, and my strategy would never need to change.
For example, if I knew a client would live deep into his/her 90s then a power saving strategy would be essential and I would recommend a much later retirement age. And since it would be known that a retiree would still have 20+ years of retirement, even if it was necessary to wait until age 70 or later, it might not seem so bad. Conversely, if I knew that a client would pass away young, prior to retirement, I might not recommend savings at all. In this scenario I would likely recommend a life insurance policy to protect the family and tell the client to spend as much as you need to enjoy life to the fullest today.
Unfortunately, (actually, very fortunately) we don’t know when we will die. And while that makes the planning process more difficult and much more organic it’s also why having a plan is key to acquiring financial success. While striving for consistent returns is beneficial to a portfolio, it’s only a minor player in the big picture of avoiding the two biggest financial disasters; dying prematurely without a plan (when people rely on you financially) and living too long without a plan (forcing you to rely on others financially. Financial Planning, and my goal as a planner, is to prepare for the worst and hope for the best.