We’ve all heard the quote, “If you fail to plan, you are planning to fail.” What did Ben Franklin really mean with that quote? Was his intent everyone should have a well-written, hard copy outline of steps to achieve their goals? Or was Franklin emphasizing the process of planning over the finished plan?
In its simplest form, a plan is nothing more than three main areas: where are you now, where you want to be at some point in the future, and how you are going to get there. If we accept Franklin’s words as a universal truth, why do so many of us fail to plan, especially with retirement planning? Having a plan provides peace of mind: that ever-elusive state retirees strive to achieve. So, should you focus on the plan or the planning process?
I would argue the process is far more important than the product. I’ve had several positions while in the USAF and Dept of Defense as a planner. The real value was not in the finished product but in the thought process. That process required us to identify desired outcomes, potential obstacles, and steps to overcome those obstacles. We needed to inventory available resources and determine how many of those resources we were willing to commit. We also had to make assumptions about the future based on what we knew at the time.
Fast forward to today in my role as a retirement advisor. I’ve seen far too many financial firms and flashy software products promising a plan to make all your financial dreams come true. These plans are often pages and pages of graphs and charts full of numbers that are obsolete the minute they are printed. Since we can’t predict the future, the assumptions we make are never entirely accurate. And…does anyone really want to read a 40+ page document full of numbers and financial jargon?
Does that mean retirement planning is time wasted? Not at all! If we focus on the process, it can have immense benefits. In this article, I’ll highlight some of the benefits of certain steps in the retirement planning process. Proper planning involves much more detail than the three areas I’ve mentioned above. But for our purposes, I’ll keep it general.
Let’s start with the first step: assessing your current situation, also known as the discovery phase. In this step, you are forced to take inventory of the resources you have available. This involves establishing a written budget. For many, this is a wake-up call. A significant number of households can only guess how much they spend every month and very few know the details of where all their money goes. With no clear knowledge of our current cash flow, Americans, in general, are woefully unprepared regarding saving money for retirement. A study conducted by the Federal Reserve Board indicates one-fourth of non-retirees have no retirement savings and less than 4 in 10 non-retirees feel their retirement savings are on track. A substantial minority of adults would struggle financially if faced with an emergency expense of as little as $400. Far fewer had three months of emergency savings in the event of a job loss. Perhaps statistics such as these make people think any planning is a futile effort. However, budgeting itself often identifies areas of unnecessary spending that can be curbed to improve your financial health. Those ‘found’ dollars can be put toward retirement savings and preparing for emergencies.
There are many tools available to help you budget. From a simple notepad and pencil to detailed software that integrates with other programs, the idea is to record exactly where your money goes. Oftentimes, it’s better to start simple to establish the habit of record-keeping and then move to more detailed layouts. After you get several months’ worth of transactions, you can review your spending and identify areas you can reduce or eliminate. You can also compare your spending with national averages to see how you compare. If you find you’re spending significantly more than average, comparison shopping may help lower expenses.
Budgeting is the foundation of any financial plan. Time and effort spent in this first step will allow for more accurate predictions of future cash flow and a better overall plan. If you would like help in developing a budget or just need a template, contact me. I’d be happy to help!
In Part II of this series, I’ll discuss the benefits of defining your future vision and goals.
Nick Naseman, RICP®
Iron Mountain Financial