Don’t Forget The Personal Side of Financial Decisions

Like me, Bill is an advice-only financial planner. He offered to share some key lessons he’s learned working with financial planning clients.

You can learn more about Bill at his firm, Emanicpare’s, website. He has also written several books, including recently publishing Plan Your Money Path to help DIY planners use Pralana’s high-fidelity retirement calculator to build their own financial plan. (Disclosure: Pralana is a long-time affiliate of this blog. Bill and his firm have no financial relationship with this blog.)

Take it away Bill…. 

What Are You Optimizing For?

Chris and I are both financial planners. We work with tools that do math for our clients. They include:

• Social Security optimizers 
• Roth conversion optimizers 
• Tax optimizers
• Retirement Success Historical and Monte Carlo calculators

It’s not always about the math. Life isn’t just about money. Life is about happiness… or should be. This is especially true in retirement, after working and perhaps raising children for decades. 

Although I’m a math nerd, I try to keep the focus on the decisions clients and I make together about happiness. “One of these choices is more optimal mathematically, but which do you think will make you more happy or less stressed?”

Planning for Couples

I encounter countless situations where one spouse or partner is the financial driver in the relationship. The other is more or less on the sidelines.

The financial driver is typically more risk-tolerant, and thus more aggressive in the family’s investments. I often find the other person in the relationship is secretly, in the background, stressed out because of a much lower tolerance for risk.

When a down stock market is in the news, they’re like a back-seat passenger without a seatbelt on a windy road, white-knuckled and hanging on. They’re often afraid to question, as they don’t feel confident in their financial knowledge. 

The driver is often oblivious, or reassuring with simple language. “I know what I’m doing, honey. It will be fine.”

This isn’t a recipe for happiness and low stress in a relationship. That’s why a risk tolerance exercise is one of the first things I do with a new couple. I want them each to be well informed not only about their risk tolerance level, but their partner’s as well. 

The results on both ends are usually surprising! Know this about yourself and your partner, and be considerate of the tendencies. 

Here’s a free risk tolerance test you can each take. Do it separately, and don’t influence each other!

You’re an Individual, Not a Rule of Thumb

Let’s look at some other examples. Social Security is a good one. 

We’re constantly subjected to click-bait articles imploring us to wait and wait. Of course, the government would prefer we wait until we die to preserve that ailing trust fund! 

The math may say the “sweet spot” for you and your spouse is a mathematically perfect scenario such as the higher earner waiting to the maximum age of 70, and the lower earner claiming earlier, and using spousal benefits at the opportune time. Sounds great.

But, what if you both have terminal health conditions and have been advised by your physicians that you may not have a long life trajectory? That changes the calculus in a non-math way. Enjoy the money now. 

When I run the Social Security optimizer for my clients, and we game out claiming early versus claiming later, it’s amazing that most times there isn’t much bearing or change in their overall chance of success, retirement income, or net worth.

When I show them the payback point for waiting is in their mid-80s, they often comment, “What will I do with the money then? I want to enjoy it while I’m young!”

In most scenarios, the difference is negligible. Yet folks agonize over this decision.

If someone has very little savings and will be relying on this benefit primarily to live, of course it’s a different situation. Remember, the actuaries and mathematicians at the Social Security Administration do a lot of careful math to ensure folks receive the same amount of money, on average, no matter when they claim.

Related: A Framework for Claiming Social Security Benefits

Roth Conversions: What is the goal?

Emotion versus math often comes up in conversations about Roth conversions. Roth conversions are frequently discussed in the personal finance blogosphere. They can be an excellent tactic.  

It can be surprising when a planning or optimization tool doesn’t recommend aggressive conversions. The tool is looking at this decision in a purely mathematical context. 

For example, if the tool sees that you aren’t planning to spend the money, it may not see a reason to pay taxes on conversions. The tool thinks, “That’s someone else’s problem–whomever you leave the money to!”

Money Likely Going to Children?

However, as a human, you decide it’s a great reason to convert, as the Roth money will grow tax-free until you pass, and then become a wonderful tax-free gift to your heirs.

By the time we pass, our children may be in the prime of their careers. If you don’t convert, the required distributions they’ll receive if they inherit a tax-deferred account may push them into higher tax brackets or have other unwanted financial consequences.

Are You Charitably Inclined?

Don’t convert money you plan to leave to charity. They don’t pay taxes on these dollars like you do!

Do You Have Long-Term Care Insurance?

Perhaps don’t convert money you plan to use for long-term care. That may result in a tax deduction if it’s enough to itemize in those years.

What If One Partner Dies Young?

If you’re using a high-fidelity planning tool like Pralana Online or Boldin, you may have optimistically set your longevity to 90 for both you and your spouse.

Part of that planning should always involve the unpleasant scenario of one of you passing away earlier in life. That would leave the surviving spouse to pay the single filer “widow/widower” tax! 

To avoid that, couples will often do Roth conversions to build up their tax-free reserves, even if the “math” says it’s not optimal.

What Lets You Sleep Better?

Our government carries a lot of debt, and that can be scary. Someday, the piper will have to be paid!

If you’re worried about future tax hikes, you may want to do Roth conversions more aggressively now. Retirement should be about enjoying your life, not worrying.

Related: When are Roth Accounts Better than Tax-Deferred?

The Hidden Cost and Risk of Complexity

I often encounter people who are excited to implement every latest complex scheme they encounter in blogs and on social media. 

Should you build a bond ladder rather than using bond funds? What about putting all your bonds in regular brokerage accounts, and all your equities in your pretax accounts? 

Yes, that will optimize every dollar, tax-wise. But how much do you really save compared to the simple path of deciding your optimal asset allocation and implementing it identically in each of your accounts and locations? I have seen clients doing these tax-saving financial gymnastics when they have fairly low financial assets and not much of a tax bill to begin with.

There are several downsides to adding this kind of complexity. First, we begin to lose our financial acumen as we age. We become more prone to mistakes. Errors can be expensive!

More tricky hacks mean our non-financially oriented spouse or partner may have trouble understanding what’s going on. This can cause stress in relationships. 

What if the financial driver passes away? The survivor, on top of grieving, is now left with something they don’t understand, and may then be taken advantage of when seeking help.

The happiest retired couples I’ve worked with keep things simple. They have an occasional meeting where they review their plan and make decisions together.

I could go on, but in closing, please don’t forget to consider the emotional, happiness, and stress factor analysis when making financial decisions. This is the beauty of having a high-definition financial plan. 

Should You DIY Retirement Planning?

Use a professional planner, or one of the few available high-definition tools available to consumers, as reviewed in the past articles here at Can I Retire Yet. Be cautious, as there are many variables to consider in a financial plan.

If you DIY, consider having an advice-only financial planner review your plan. Don’t be penny-wise and pound-foolish with such important decisions. Mistakes can be expensive!

Chris’ $.02

As we head into the end of the year and the start of a new one, many people have financial planning on their mind. Bill shared a number of key messages. I want to focus on what I consider the most important.

Don’t make things more complicated than necessary! Darrow made simplicity a foundational message on this blog from its earliest days.

This is a theme I frequently need to be reminded of. Bill has been a person who played that role for me. He called me out on this in the comments of this blog several times over the years when I stray from simplicity. I appreciate him for it, and encourage you to keep this message in mind and you build your financial plans.

Related: Financial Simplicity — What is your time worth?

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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