How Financial Planning can be More Impactful than the Market

Marshall Rathmell |

At BCR, we believe that you should focus on the things that you can control and find a way to live with the things you can’t.  While the investments you select are important, at BCR we believe that financial planning is more important to control.  Some investors make better decisions than others, but if you are using a proven investment philosophy, then the biggest impact typically comes from your behavior. 


I get it, you can’t just put your savings in a bank account or CD and end up with enough to retire, but bear with me on your focus.


Financial planning helps you decide how much to save, what you can afford to live on (before and during retirement), what you need to insure, and make sound decisions between retirement date and lifestyle.


To really grasp the impact planning can have over market performance let me tell you stories about Victor and Victoria.


Suppose Victor has an income of $100,000 per year and saves 1% of his total income each year for 20 years.  Let's assume Victor's salary goes go up 2% a year with the cost of living.  Finally, we'll assume that the market provides a very generous 8% yearly return on his portfolio.


The result?  In 20 years, Victor’s portfolio would be worth $93,741.65.  Not bad, you say?  That’s almost one year’s worth of Victor’s original income.


Now let's suppose Victoria has the same earnings career but, sets aside 7% of her income each year.  Alas, Victoria experiences a less favorable time in the markets, and her portfolio goes up just 4% a year--half of what Victor was earning. 


Even so, after 20 years, Victoria's portfolio is worth $373,183.84--more than three times more than Victor's, even though Victor had a much higher rate of return on his portfolio. 


If Victoria were to save 10% of her income—which frankly is still less than we see a typical plan needs to reach our clients’ goals--and if she were to get the same rate of return as the less thrifty person with a 1% savings rate, her terminal wealth would be almost exactly TEN TIMES as much as Victor's.


As you know, the numbers are never this tidy; you would never earn the same return each year, and most of us don't receive the same salary increase from one year to the next.  But the point, which can be made with much more complicated illustrations, is that, in general, the plan helps determine the amount you need to save, and the savings matter more than rates of return. 


No matter how much the press focusses on the market to achieve what is important to you, focus on the plan and the things that you can control. Then go out and enjoy your life instead of worrying about the short-term market changes.




Some of the material above was provided by Bob Veres Insider Information