The Financial Doctor

Imagine you are afflicted by a temperature and a sore throat.

You visit your family doctor and have the following conversation with him:

Me: I’m not feeling well.
Doctor: What is your ailment?
Me: I have a group A streptococcus infection.
Doctor: If that’s what you think you got, I can give you an appropriate prescription to help. Do you have any allergies and for how long would you like to take your medication?
Me: I’m sensitive to benzylpenicillin, I’d like to feel well in one week.
Doctor: Based on your diagnosis and sensitivity, I’ll write you a prescription for Amoxicillin. You’ll have a 55% probability of feeling better within your time horizon.

Sounds a little weird?

This (imaginary) doctor is extremely helpful by knowing the best medications based on my diagnosis, their efficacy and how to work around my specific allergy. That saves me a lot of time and research!

Still, we’d usually expect a doctor to solve the entire problem for us… you know… the diagnosis part for a start! Since most of us have not studied medicine, we’d like to just have to describe our symptoms. We’d like to be told how long it will take to heal instead of the other way around.

Here is a very condensed version of the conversation at my first appointment with a financial advisor:

Me: I’d like some help preparing a financial plan for my retirement.
Advisor: At what age will you retire? By what age do you think you will die?
Me: Retire at 61? Probably dead by 90.
Advisor: I can help prepare a plan for you. How much have you saved so far, what is your desired retirement income and what is your tolerance for risk?
Me: I have saved X dollars and have Y equity in my home. I’d like to get Z net dollars per month. Not much of a risk taker.
Advisor (after filling in my numbers in a web form): Based on your dates of retirement and death, the amount you have saved and your risk tolerance, here is a plan: Downsize your home when you retire and invest 30% of your savings in a US-market ETF, 5% in international stocks, 30% in treasuries and 20% in corporate bonds. You’ll have an 80% probability of not running out of money within your time horizon.

Sounds weird? It shouldn’t! From what I hear from my friends and co-workers, this is a relative common (if partial and simplified) discussion most people have if they visit a financial advisor to get some help with their retirement plans.

But at the time it happened, I confess I found it quite odd.
Where to start?:
Advisor: By what age do you think you will die?
(Ok, maybe her actual wording was more tactful, but that was the gist of it, and I did have to provide a precise age number.)

Is this a serious question?
Obviously, if I could predict the future, I wouldn’t need to visit a financial advisor.

Talking to the advisor was very valuable, it gave me a starting point, a viable plan based on my assumptions and provided some additional information about about some investing and retirement topics that I had not yet investigated.

Still, it’s only a partial solution.

What I really need is a flexible plan that has a reasonable probability of success regardless of how long me and my wife will live and our future health conditions.

Different people have different priorities and perceptions, so it’s great that the financial advisor inquired about my goals, expectations and even risk tolerance and could in part adjust my plan accordingly. But in the end, I’m not even sure exactly when I will retire and there is no point in being a conservative investor if that sets me up for failure.

My ideal advisor wouldn’t ask me about dates of retirement and death and other unknowns. She would suggest the ideal range of dates for my retirement, noting how my risks vary through that range.
She would compute the ideal amount of investment risk I should take based on my situation and my goals.

In fairness, this is likely just a limitation of the current software used by financial advisors. I bet that in a few years those tools will improve and automatically provide a variety of scenarios, like a range of possible retirement dates, retirement incomes and risk factors.

In a future posts, I’ll write about how our current “system” makes retirement harder than it should be by requiring us to predict our longevity and other variables and by requiring some level of financial and economic literacy.

Since most of us cannot escape the current system, we need to do our own research, learn about investing and come out with our best guesses for unknown quantities (like our lifespan and future taxation) that may be needed to model our retirement and formulate a good plan.
(Did I mention those are some of the main subjects of this blog?)