Back in high school, I had a teacher who said something along the lines of “You should always be flexible – that way you’re never bent out of shape.” Turns out, he most likely didn’t originate it (lots of people are claiming that distinction) – and his application was more centered around personal attitudes towards expectations in life.
However, like any financial writer, I’m going to apply a non-finance concept to finances.
A good financial plan is going to do a lot. It’s going to include cash-flow, both current and future.
It’s going to look at your estate planning.
It’s going to do a tax analysis.
It’s going to determine your best asset allocation to meet your goals.
It’s going to take a look at your life insurance, among other insurances, need and coverage.
It’s going to try and figure out what is most important to you, and create a plan for your money to fulfill those things.
And all of those components are woven together, not too dissimilar to a tapestry of sorts. All interconnected, all doing their part, all important in and of themselves – yet all the more powerful when combined.
BUT
They are guesses. Educated, informed, thought-out guesses. But guesses nonetheless.
Because – really, are we going to know what our electricity bill is going to be 10, 20, 30 years from now? The tax code? The market returns? Probably not. Even more broadly than that – we’re not going to know what’s important to us then. We don’t even know what’s important to us right now at times! The person we will become may look very, very different than the person we are today.
So this is why flexibility is so vital to the health of a financial plan. Flexibility to roll with the punches – from things outside of our control, but also things very much so within our control.
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This isn’t necessarily a hot take. I typically don’t get a lot of pushback when talking about this idea – but as I wrote earlier about Planning being more important than The Plan – we still need reminded of things at times. The idea of an 80-page, leather-bound plan of the older days is still prominent not just in the finance advice industry, but in our lives as a whole.
We want things to be linear, predictable, calculated.
We want 1+1+1+1+1+1+1 = 7
What we get is 1+2+4-3-2+0+5 = 7 (head nod to @dmuthuk)
People lose jobs. People change careers. People start businesses. Marriages fail. Children come into the picture – or don’t. Family members get sick. Our own goals change, or evolve. People move around the country – or the world. Markets and economies plummet.
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Knowing this – here is a somewhat random list of areas where we should strive for more flexibility in our plans.
Use of debt
Maybe the area my mind goes to the most is debt. Anytime we borrow money, we’re presuming on the future and our ability to pay it back. I wrote about that awhile back, but the summary is if we borrow, we should have an as-close-to-possible guaranteed way to get out of the loan in a short time period. Looking at the list of potential changes above, having lingering debt can really derail some of them.
Tax location
I’ve spent an inordinate amount of time researching and projecting the whole “Roth or not to Roth” idea with clients across the marginal-income-tax brackets spectrum. There’s so much we don’t know about the future – how much income we’ll make, what the tax brackets will be, how things will be taxed. I can’t answer what’s best for everyone, but I will say that having more options is generally preferred just for the sake of flexibility.
Roths
Speaking of Roths – I love them for the flexibility. Yes, you should most likely keep those dollars within the tax-friendly shelter of a Roth account as long as possible (even in retirement if you have tax-deferred accounts, probably). BUT – if life were to change, and your goals were to change, the Roth gives you more options in taking earlier-than-expected withdrawals without penalty.
Short term savings
If you’re reading this, you probably don’t personally need another reminder about the importance of an emergency fund (or opportunity fund, as I’ve heard it referred to as well). Having safe, easily accessible funds not only alleviates stress when things don’t go according to plan, they also afford us the ability to pursue other opportunities as they come up without raiding other areas of our finances, like retirement savings.
Retirement
I mentioned above about goals changing – and I can’t wait to see my personal thoughts on retirement in another 10 years. As a 36 year old, I’ve really evolved from how I viewed retirement as a 26 year old. The concept that one of the first steps you should be taking is maxing retirement accounts in your accumulation era is one I hold more and more loosely over the years. Maybe you should. Maybe you shouldn’t. For sure, we should be preparing for Tomorrow to some degree … but what if we get to that point and decide that we’re not ready to hang it up? That we actually find value in the work that we’re doing, or creating? Should we be allocating our cash-flow to other shorter-term goals and opportunities closer to Today? Perhaps allocating in a way that gets us in a position to not want to completely cease work at a later date? (Love this Carl Richards thread on the topic.)
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This isn’t a comprehensive list – not by a long shot. Even so, I’m sure people could read each one and nit-pick it, saying I’m being a little too flax. That’s fine.
My point is that we should strive for flexibility. As individuals, we should be realizing that our plans are not going to always go according to – well – plan. As advisors, we should be co-creating plans with our clients that allow for life changes.
Some things are outside our control. Some things are within our control. But it actually doesn’t matter – what does matter is having a plan flexible enough to adapt and thrive, a plan flexible enough to not get bent out of shape.