Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.

Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.

How financial planners address plan uncertainty | Guest column

  • Tuesday, November 16, 2021 2:00pm
  • Business

One of the key challenges we face as financial planners is dealing with the uncertainties around forecasts and assumptions in the planning process.

I like to categorize these uncertainties into what I call “macro” uncertainties and “micro” uncertainties. Macro uncertainties relate to broader economic or policy issues that have a bearing on individual finances and investments. Some of these uncertainties include things like the outlook for the economy, inflation, expected returns on investment asset classes (such as stocks, bond, commodities, etc.), and the outlook for tax and government policies. Micro uncertainties are more within the realm of one’s personal financial circumstances and can include things such as income and resource adequacy, personal or family health situation, expense projections, longevity, and estate planning goals.

With respect to macro uncertainties, an important part of our work as planners is understanding the economy and financial markets and combining both historical information and reasoned judgements about the future to make our best estimates of investment returns and inflation.

Government policy as it pertains to Social Security, tax policy, and Medicare is also something we study in detail in order to identify changes or trends that that could have an important bearing on a financial plan.

Micro uncertainties are, in some ways, more difficult to predict than macro uncertainties. Trying to project as person’s future health or longevity is difficult but it can have a dramatic impact on a plan’s outcome. We know that people are living longer, so to address longevity risk, we are generally running plans for most people into their 90s.

Increasingly, we are also addressing longevity risk by incorporating two or three years of assisted living expenses. Current known health factors can also be incorporated into plan assumptions. Budgeting and expense projections are obviously very important. As planners we can provide guidance on expense levels appropriate to achieving one’s goals, but we cannot manage or control the risk of a client spending at a level that could jeopardize the plan. One way we can address the “overspending” risk is to meet annually with a client and update the plan. A deeper understanding of the emotional aspects of a client’s spending proclivities, life goals, and current financial circumstances can also be incorporated in addressing spending risk.

Because none of us can forecast the future, one might ask with all these uncertainties how can one feel confident in a financial plan and the assumptions within it?

The challenge for us as planners is to make reasoned and appropriate assessments for these factors and incorporate those assumptions in a way that is not only constructive but also mitigates forecasting risk. The quality of a financial plan is only as good as the assumptions incorporated in the plan and, of course, the experience and insight of the planner.

The benefits of a good financial plan can far outweigh the uncertainties discussed above by providing significantly improved clarity into one’s financial outlook and greater confidence in achieving financial and life goals.

Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.


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