For anyone who is approaching retirement or had the unfortunate timing to retire at the beginning of 2020, COVID-19 is like a bad weather forecast that threatens to stretch over your entire summer vacation. Only worse.
While we call it “financial planning”, the cornerstone and main goal of almost every plan is to retire comfortably and live a worry-free life into old age. Anything that threatens that, like poor returns in your retirement investments, or the prospect of poor returns in your retirement investments, is to be avoided at all costs.
To some this isn’t an issue. Warren Buffet doesn’t have to worry – not so much because he has more money than some countries, but more because he is never going to retire. But for the average Canadian, retirement is among their most important goals, and that retirement almost always depends on a variety of factors – things like inflation, budgeting, getting kids launched, and investment performance.
One of the tremendous benefits of financial planning is that it forces us to quantify what we will need and when we will need it, allowing us to build plans to have the right amount at the right time. Planning helps us determine the next step, and the many steps along the way and inspires us to move forward with confidence towards what may appear to be lofty goals.
But it is quite possible to get too attached to a specific scenario and that can reveal a potential weakness of financial planning: it’s not an exact science, but it’s easy to fall into the trap of believing that it is. In doing so, we tend to overlook a key human characteristic – our ability to adapt.
The important assumptions that are baked into any long-term plan are almost entirely out of our control, and thus, almost certainly wrong. It behooves the planner then to use assumptions that are not only “realistic,” but perhaps even overly conservative. For the most part, I believe good planners are doing just that.
Still, most plans assume a completely unrealistic consistency year to year. We assume inflation is 3% every year, and that returns are 4% every year. In fact, almost every year, they are something different. So, when events happen, and returns are below (sometimes far below) expectations, plans will almost certainly appear to be temporarily off-track.
Looking back over the past 25 years reveals the impossible task of making assumptions. The double-digit inflation of the 70s and 80s lead us all to believe that the inflation boogieman was just around every corner. And yet inflation fell to low single digits in the 90s and has stayed there ever since. Stock markets roared in the late 90s and then the Boomernomics thesis convinced us all that the best was yet to come. But stock markets in the first decade of this century were a consistent string of disappointments. House prices collapsed in 1989 but have since then been among the best performing asset classes. The point here is this: some assumptions are going to be wrong to a spectacular degree, but that doesn’t necessarily mean the underlying plan is going to fail.
Sure, the pandemic is different. It’s not just our finances that are being affected, it’s our lives. Lots of things have changed and may keep changing. If you had travel booked in 2020 to celebrate year one of your retirement then yes, COVID-19 has upset your plans. But, most people will simply take the trip in 2021 or if that’s too soon, 2022. Or perhaps never if they realize that travel wasn’t the most important retirement goal after all (those grandkids are a lot of fun).
Undoubtedly, some people will postpone retirement because they just don’t feel comfortable now. But, most people have noticed that while investments are down, expenses are down as well and many of these same people are thinking that they overshot altogether with their earlier projections for retirement expenses. Some individuals who face seismic shifts in their work life or are enjoying life at home more than they expected may in fact retire earlier than planned.
We adapt. We do it instinctively, and for the most part happily. When a situation calls for change, as painful as change is, we do so. And later we claim it was easy.
The world around us, and our vision of the future we will live in, change frequently. Our families grow and shrink and grow again. Our careers take us to places we hadn’t imagined, and shift gears in surprising, sometimes disappointing ways. And our dreams expand and shrink based on our outlook, our confidence, and our willingness to step into an unknown future. At each point of change we adapt. We change our starting point to reflect the new now, adjust our picture of tomorrow and then reflect that in our financial plan. The question is never “where was I supposed to be at this point?” but rather “where do I want to go from here?”
Is COVD-19 going to affect your retirement? Probably yes. It is affecting almost everything. But is your retirement derailed, scuttled, postponed indefinitely, ruined, or permanently damaged? Almost certainly no, but that may depend on your willingness to adapt. Update your financial plan to reflect the new reality, and your revised vision of your future. You might be pleasantly surprised. One thing I have learned in 25 years of financial planning is that things almost always turn out better when we keep our focus on the distant future.