Predicting the future is hard. When I was a kid, I was going to grow up to be either the quarterback for the Dallas Cowboys or a semi-truck driver. It turns out that driving long distances makes me very restless, ruling out the truck thing, and I grew to the size of a field goal kicker and not a pro quarterback. So how did I end up as a guy in a suit most days? Well, this illustrates how difficult it is to predict the future.
One of the planning decisions that affects all other planning decisions involves the breakeven analysis. In short, it’s the calculation that involves an initial investment and the point in time down the road where that initial investment turns positive. In other words, how long will it take for this pay off? And while this is a very useful context for making financial decisions (or someday-pro quarterback decisions), there’s just no way of accurately predicting all of the variables that may arise. What if taxes rise, interest rates drop, the company goes bankrupt, the government changes regulations, another more compelling need for the money pops up? There are an almost infinite number of reasons why the breakeven analysis fails us.
Yet, we still use the breakeven analysis all the time. Why? Back to where we started, predicting the future is very difficult to do. As a result, we use whatever tools we have available. Using the breakeven analysis for determining when to begin receiving Social Security benefits as an example, we simply ask ourselves, “How long do I think I’ll live?” For when it comes to an investment like Social Security income, we know it stops when we pass away (or our spouse passes away), so applying a life expectancy breakeven analysis to the total income calculation allows us to cut through a fair amount of clutter to make a decent decision about when to begin benefits, even though we really don’t know how long we’ll live.
We’ve discussed this concept when looking at pension lump sum decisions. Breakeven analysis helps with determining whether to finance a car or pay cash, whether to buy a house or rent, how to pay for college, and on and on. Knowing the flaws and pitfalls of the breakeven analysis, however, we know that some things are just impossible to get right. But don’t we inherently know that already? I don’t think any of us are under the illusion that there’s any one right answer to most financial decisions. We’re doing our best to…well, do our best.
The real challenge is to apply a reasonable analysis to Social Security decisions, pension lump sum decisions, investment decisions, insurance decisions, financing decisions, and more…all at the same time! Putting all of these pieces together in a way that provides the highest probability of success while tempering the risks is what we aim to do when we’re working through the planning process. And once the plan is crafted and set into motion, we meet regularly to discuss new variables that may have entered into the scenario that require further thought. Said a different way, we do our best to predict an uncertain future and then adjust as we go as the future becomes the present. Then repeat.
When I consider how badly I wanted to be a pro quarterback, I’m glad nobody shared with me how long the odds were. That would have stolen much of my joy. And driving a truck didn’t suit me but for reasons that wouldn’t become clear until long after I got my driver’s license and learned about my penchant for long-trip boredom behind the wheel. These variables just took time to present themselves. In my case, the best thing to do was to dream about big things while studying hard as if the future was wildly unknowable, because it is.
For retirees, this looks like making investment and income decisions for the very long-term while staying as flexible as possible for responsiveness to the short-term variables that life throws our way. No silver bullets, no pie in the sky, just solid decision-making with a dose of dreaming sprinkled on top. That’s a game plan that makes sense even when the game changes on you or you decide to change the game altogether.
By the way, I’d love to hear what you wanted to be when you grew up. Reply to this message and let me know!
All the best,
Adam Cufr, RICP®