Forever standing on the side of our clients..especially now. See resources we have developed to help through this COVID-19 crisis. Learn More

In the midst of COVID-19, how do I know my financial plan is still on track?

Market volatility, employment stress and health care concerns may have you wondering if your financial plan is still on track. Aaron Grey shares ways to assess if your plan can still meet your long-term goals.

Transcript

Tim Maurer:
Tim Maurer back with another episode of, Ask Buckingham. A new video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today’s question will be answered by Aaron Grey, longtime wealth advisor and Buckingham’s Director of Planning Integration. Aaron, I’m going to hit you with a tough one today. In the midst of the coven 19 crisis, how do I know my financial plan is actually still on track?

Aaron Grey:
Oh, that is a great question, Tim. And that’s a question that we’re trying to answer with a lot of clients, as we have conversations over the last few weeks. Here’s the most important thing and the way that we want to set this up and think about the financial plan. The financial plan is less of a GPS that has everything with precision figured out that we’re going to turn left up here, we’re going to turn right up there, it is more of a compass. We have a destination in mind. We know what We want your retirement to look like. We understand what the values are built and what’s important to you. And we want to always revisit that plan and check to make sure, like a compass would, what direction are we pointed? Are we headed in the right direction?

Aaron Grey:
And then hopefully quantify and figure out what do we need to do over the next three, six, twelve months, to get us a little bit closer to what that end goal is. That’s really the context of the financial plan and certainly the market events over the last series of weeks is throwing a lot of plans off course but that just means that we look up to the stars or we look down at our compass and say, “Okay, the goal is over here now, so we need to refocus, understand what we can control today, what we can do today to get us a little bit closer to the plan.” And that’s really the most important thing to do in the context of looking at the financial plan these days.

Tim Maurer:
Excellent. I think I resonate with that compass versus GPS to be sure. Of course, we all prefer a bit more specificity but that’s not the stuff that life is made of. Now, in terms of specifically knowing if I have justification for believing my financial plan is still on track, are there any tools or techniques used in the advisory world, in order to help us get a clearer picture of how well we might be keeping up with our financial plan?

Aaron Grey:
Definitely. And hopefully this is something that all clients are familiar with. With any advisor, when they talk about their financial plan, their advisor should be asking, understanding what are the goals specifically in retirement? What does that look like? And not only should we have an understanding but we should begin to model that out and actually have some tools to say, “Okay, here’s how strong your plan looks and here are the things we need to do between now and retirement to get you to that goal.” And so, there’s a number of tools that could be used. There’s something, it is a term called, a Monte Carlo Analysis out there. That’s just a statistical name for a way for us to model the client’s future and understand there’s a lot of things, the market in particular, that we can’t control. So, outside of our ability to control the markets, let’s focus on controlling the controllable and then plan for the vulnerability of markets doing all kinds of crazy things, good, bad, indifferent along the way.

Aaron Grey:
And that’s the primary tool that we use in Monte Carlo Analysis with clients and this is the time we can go back and reference to see how that number has changed, three months ago to today. It shouldn’t be a surprise to anybody, obviously, a well thought out plan is still going to be showing some damage per se when the markets are down 25, 30% over a short period of time. But it is also a unique opportunity right now, today, you can go look at the plan and say, “Okay, we’ve lived through one of these great events, these outliers that we are stressed testing a plan against and during normal time.” What does that actually do to my plan? Does it really sink it or am I still hanging in there? And you can really learn something, there again. So you can take that moving forward to make sure that the plan as you continue to approach retirement, you’re doing the right kinds of things and building the right kind of defenses if we’ve exposed some weaknesses in a time like we are seeing right now.

Tim Maurer:
Now hold on a second, Aaron. Are you telling me that the primary tool we’re utilizing in order to determine whether or not somebody’s financial plan is on track is called a Monte Carlo tool? This is a gambling device, of sorts?

Aaron Grey:
It’s an unfortunate name. The statisticians gave it the name. Truth be told, Tim, it is called that because the new statistical analysis was born of predicting the different sequences of cards that might come out when you’re flipping a deck of cards. So, there are some roots from the actual Monte Carlo, but trust me, there’s nothing about gambling in this one. It’s more about testing your vulnerability to unpredictable sequences.

Tim Maurer:
Okay. So could you talk a little bit in layman’s terms about exactly how Monte Carlo analysis works?

Aaron Grey:
Absolutely. So as I said, we can control a lot of things about a plan. We know roughly when you’d like to retire, so we have an age there. We know how much we’re saving now and how much we plan to save in the future. We even have plans for how much we plan to spend from retirement all the way till the end of the plan. There’s a lot of things that we have input on, with levers that we can pull in the plan. The one thing that we all know that we can’t predict and we can’t control, is the behavior of the stock markets. They’ll go up, they’ll go down. We know over the long run and we can have a fair amount of confidence over the long run if they’re going to be a higher returner than say, the bond market or the cash market because there’s a highest level of risk.

Aaron Grey:
But what we don’t know, is whether the market’s going to be good, bad or indifferent, today tomorrow or next year. So, what the Monte Carlo specifically is designed to do is, it takes a lot of different potential with made up sequences of return, put them in a blender, book them all back together and says, “Okay, I’m going to live my client’s life 1000 different times over each of these different scenarios, these different sequences of return.” And what we want to look for, is how many times do we get to the end of the plan and we were able to spend every dollar that we wanted to. And how many times we’d get to the end of the plan and we’re a little bit short and that is the measure of strength.

Aaron Grey:
I call it degrees of strength when we’re looking at it. In this net analysis, you don’t want a score of 100, it’s almost like a crash test for a car. There’s no cars out there on the road that have a 100% crash test rating. Now there’s a lot that have airbags and seat belts and a lot of safety measures. We like those kind of plans for clients but scoring a 100 on that analysis, all that really does is basically guarantee that your beneficiaries are going to get a lot of money at the end of the plan. Which may be part of any individual’s financial plan but we also want to make sure that you can live the life that you want to live in retirement.

Tim Maurer:
Sure. And of course, since we’re randomizing events that we don’t necessarily know exactly what’s going to happen. There truly is no real 100%, right? Or what’s number that you’d actually be comfortable with? Is there a litmus test for a plan that you’re satisfied with in terms of Monte Carlo Analysis?

Aaron Grey:
So when you run that analysis, if you get a score of 50 and it scores through zero to 100. If you’ve got a score of 50, that means on average 50% of the time, you’re going to be golden. But that also means, 50% of the time, you’re not so golden. And we have a much higher threshold from that. This by the way, Tim, major mistake that a lot of do-it-yourselfers I think make, when they’re doing their own retirement planning. Is they’ll do that projection and understand everything about their savings and their spending and they’ll throw it into a spreadsheet and say, “Okay, what’s a conservative return?”

Aaron Grey:
Maybe four percent is a conservative annual return and they’ll assume four percent every year for the rest of their life. And they look at it and say, “Wow, it looks great.” The problem is while four percent might be a very reasonable return estimation on average, we don’t get … the life is not average. We don’t get four every year in that scenario. You get a negative two and then you get an eight then you get six then you get a four and a zero and a seven and it bounces all around in this specific sequence. That’s where the risk lies.

Tim Maurer:
So, you’re telling me that just simply determining a static rate of return or amount of income, say like four or five percent is inferior to doing this Monte Carlo Analysis and randomizing the types of returns one might experience over a lifetime.

Aaron Grey:
Exactly. Since that is more like real life, we don’t get the static returns year by year, year after year. We know that there’s variation year to year in those returns. So we want to model what real life in the future might look like. Understanding we can’t predict exactly what it will be. So, let’s come up with a wide variety of different outcomes, different sequences that may happen over the next series of years and test the plan against that.

Aaron Grey:
And the bottom line when we do the analysis in terms of what we view as a passing test, I mentioned earlier 50% is on average, but we have a way higher standard than on average. We want to see that up in the neighborhood of 70, 80, 90% in practice but it actually depends a little bit on the age of the client because the younger you are the the wider range of outcomes you get at the end of the plan. So, we open up that stress test a little bit in terms of our passing score. But as you get retire, 85 plus is where we want to see you and there’s a lot of curve balls life can throw at us that that covers.

Tim Maurer:

Curve balls, indeed. One last question for you, Aaron. On this Monte Carlo Analysis, are there any particular mistakes that you see people making in the utilization of this statistical analysis? Because I assume, garbage in is still garbage out. What are some of the mistakes you see people making with Monte Carlo Analysis?

Aaron Grey:
Well, the biggest input that you really want to make sure that you’re comfortable with are the assumptions about how the asset classes are going to behave into the future. So, one mistake that I would offer would be, if we’re looking at history and looking at history exclusively, to then assume forward looking what the returns are going to be. I would say the stock market or the bond market or any other asset classes we grab, both from a return standpoint, a volatility standpoint and also the correlations among all of the various asset classes that you can put into a portfolio.

Aaron Grey:
You want to be really careful or really competent in the numbers that you’re plugging into to a Monte Carlo calculation there. And I could say that certainly in our methodology, we have a lot of very smart folks on an investment analysis committee that spend a lot of time circling in on those numbers. History informs what our forward looking expected returns are going to be but there’s a lot more to it. And so, we have a lot of confidence in numbers we ultimately put into that calculation.

Tim Maurer:
Excellent. Thank you so much, Aaron. And thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website. Askbuckingham.com or by emailing your question to, question, at Askbuckingham.com or just clicking the upper corner of your screen and it’ll take you directly to the website where you can plug your question in. Remember, there are no dumb questions but unfortunately there are plenty of poor
answers out there. Our hope is that in giving you straight answers to your questions, it will bring a sense of calm and allow you to apply what you learned in pursuit of good decision making. So, please follow us and by all means, Ask Buckingham.

Ask us a question for a video.

Our hope is that in giving you straight answers to some questions weighing on your mind, you’ll be able to apply that knowledge in pursuit of good decision-making. If there is a topic you’d like us to address in a future video, share your idea with us!

Featured Guests

cheri dorsey
Cheri Dorsey
Co-Founder & Owner of Sessa & Dorsey, LLC

Cheri is the co-founder and owner of Sessa & Dorsey, LLC, an estates and trusts boutique law firm practice.

Mike Kenneally
Vice President & Co-Founder at ECD Lacrosse

Mike Kenneally is vice-president and co-founder of East Coast Dyes Lacrosse, a small lacrosse equipment manufacturing company in Maryland.

michael_oneal
Michael O'Neal
Executive Director at OneWorld Health

Michael is the executive director of the global nonprofit One World Health, which partners with communities in developing countries to bring permanent, sustainable healthcare to the chronically underserved.

Moira Somers
Dr. Moira Somers, Ph.D, C.Psych
Neuropsychologist, Professor and Executive Coach

A neuropsychologist, Moira specializes in the growing new field of financial psychology.

Meir Statman
Meir Statman, PhD
Research Advisor

Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University. His research focuses on how investors and money managers make financial decisions and how these decisions are reflected in financial markets.

Featured Associates

Tom Bodin
Tom Bodin
Practice Integration Officer

As a Practice Integration Officer at Buckingham, Tom Bodin provides fractional CFO services to align wealth creation strategies for owners of legal, dental, and medical offices including tax, pension and retirement planning.

Aaron Grey
Aaron Grey
Director of Planning Integration

As the director of planning integration at Buckingham, Aaron helps advisors develop, implement, monitor and update wealth management strategies in pursuit of their clients’ financial goals.

Kevin Grogan
Kevin Grogan
Managing Director, Investment Strategy

Guided by academic research, Kevin Grogan, Director of Investment Strategy, oversees our overall strategy and helps clients and advisors alike distill complex investing topics. 

Jared Hoffman
Jared Hoffman
Managing Director, Relationship Management

As Managing Director at Buckingham, Jared provides education on best practices around cybersecurity. He is a member of Infraguard, a partnership between the FBI and public sector created to share information on cybercrime.

blerina_hysi
Blerina Hysi
Fixed Income Trading Manager

As fixed income trading manager, Blerina helps construct and maintain customized bond portfolios, all with an eye toward finding the best way to implement the client’s comprehensive financial plan.

Jared Kizer, CFA
Chief Investment Officer

As Chief Investment Officer and chair of the firm’s Investment Policy Committee, Jared evaluates findings from academic research and applies that learning to architect the firm’s investment strategy.

Jeffrey Levine
Jeffrey Levine
Director of Advanced Planning

As Director of Advanced Planning, Jeffrey serves as a technical resource for advisors and the firm’s primary thought leader regarding evidence-based planning concepts and strategies.

Irv Rothenberg
Irv Rothenberg
Wealth Advisor (Retired)

A Buckingham wealth advisor (retired) with more than 40 years’ experience, Irv’s passion is helping advisors and their clients create meaningful conversations around important end of life issues.

Jonathan Scheid
Jonathan Scheid, CFA, AIF
Managing Director, Solutions

With over 20 years of experience working with advisors and their clients, Jonathan enjoys sharing interesting perspectives on a wide range of investment and economic topics.

Brant Steck, CFP®
Brant Steck, CFP®
Risk Management Consultant, First Element Insurance Partners

Brant is a Risk Management Consultant at First Element Insurance Partners.

Susan Strasbaugh
Susan Strasbaugh
Wealth Advisor

As part of a firm of fiduciary, fee-only wealth advisors, Susan takes a total-care approach to identifying, organizing, planning, implementing and coordinating clients’ most important financial goals.

Larry Swedroe
Larry Swedroe
Chief Research Officer

As Chief Research Officer, Larry Swedroe has authored or co-authored 16 financial books and devotes all of his time to research and education in the areas of investing, financial planning and behavioral finance.