Numbers are a beautiful thing. Easy for me to say - I’m a former engineer, and once an engineer, always an engineer.
Numbers and math have helped us solve complex problems from all disciplines of life. Numbers helped us send astronauts into space, operate a global economy, and develop vaccines. But for all their utility, numbers have never decided anything by themselves – that’s strictly the province of people.
We’re in an age of “Big Data” with countless apps and a multitude of financial planning shortcuts to help us in our ever-busy lives. Want to know when you can possibly retire? Punch the data into an online calculator. Want to know how much you can potentially spend in retirement? Use the 4% rule. Want to know how much house you may be able to afford? Use the 28% rule or the 30% rule. And so on and so on…
Gather the data, plug and chug, and get your answer. The challenge is that instead of you running the numbers, the numbers are now running you. So how can we get back in charge?
Here are a few ideas to help us best use “the numbers”:
Know the Limitation of Simple Calculators and Shortcuts
Our brains are hardwired to look for shortcuts. We gravitate toward the simple constructs, and we like easy answers. But if one’s financial and life situation isn’t correspondingly simple then the shortcuts might not work.
The calculators and shortcuts probably don’t know that you want to leave “x” amount of money to important people or organizations in your life. Or that you do or don’t have long term care insurance, disability insurance or liability coverage. Or that you are a conservative investor. Or that your retirement years might involve caring for your aging parents or helping your children.
Don’t Rush Into The Numbers
I was recently a guest on the Woodward “Your Money in 20” podcast, where we were asked to recommend personal finance books. My choice was The New Retirementality by Mitch Anthony. One of my favorite quotes from the book is, “Decide what kind of life you want and then arrange your financial affairs accordingly.”
In other words, start with what you want and then incorporate the numbers. Many folks just assume that if they just turned 60 or 65 or 67 or 70, then they should probably retire. Maybe, maybe not. Or, alternatively, they set some sort of account balance goal (e.g., “I need to get to $1M or $2M or $5M or $10M – then I can retire.”). Again, maybe, or maybe not.
Instead, it may be better to not start by running the numbers. A better construct might be: think, plan, run the numbers, and review. Work the trade-space.
As Mitch Anthony says, don’t put the “…Money cart before the Life horse.”
Incorporate qualitative factors into your analysis, like uncertainty and your personal comfort level.
Uncertainty will always be part of our financial, personal, and family lives. And everyone prepares for and deals with uncertainty in a different way. We all have our own personal comfort level with different aspects of finances that should be factored into any numerical analysis.
So, at the end of the day, numbers are quite useful. They help us confirm, double-check, quantify, and numerically model our retirements. But the questions we ask before launching into the numbers and how to use the numbers are equally important. Ideally, the numbers work in concert with our goals and allow us to explore a variety of financial and life trade-spaces.
Written by Joe Marques, CFP®