“All models are wrong. Some are useful.”
That’s a quote from George Box, a British statistician.
It’s also the best one-sentence description of financial planning I’ve ever come across.
Re-running the numbers
Over the years, I’ve noticed something.
A client and I build a plan together.
We look at it. Consider two or three alternate scenarios. Then we move forward. Take action.
But some people want more.
They want to look at eight or ten scenarios, often changing a single variable by a small amount, to see what happens.
What if you save $2,000 more per year?
What if you retire at 63 instead of 62?
What if you live to 97 instead of 95?
My answer is always the same: planning should be directionally correct.
It isn’t accurate. It can’t be.
I don’t mind doing the work to look at alternate scenarios, but it isn’t possible to capture every possible future.
Your plan is a reflection of what we know and understand right now, combined with our best guess about what might happen and where you’d like to go.
Some clients hear that and let go of the extra scenarios.
Some can’t.
I regularly hear about advisors and consumers alike, committed to diving deep down every rabbit hole, exploring every permutation of what their plan and their life might look like.
That’s not wrong.
I understand the impulse.
But watching it happen, I think of Don Quixote, lance lowered, charging a windmill he’s certain is a giant.
Usually it’s not about the spreadsheet or the software.
It’s the feeling — the fear — that you can’t afford to get this wrong.
Don’t misunderstand me… one of the benefits of working with an advisor is the ability to consider alternatives in your plan and your life.
And sometimes there’s value in going through 8 or 10 scenarios.
But at some point, too many alternatives can lead to confusion or indecision.
Wrong doesn’t mean useless
Wanting that certainty isn’t irrational. It’s human.
But accuracy and usefulness aren’t the same thing.
A financial plan can’t predict your future.
It’s like judging a map by whether it matches the terrain exactly, down to every rock and rut.
A map was never meant to be the terrain.
It’s trying to get you where you’re going.
No matter how much data you add or how many scenarios you run, your plan will be wrong.
Not eventually wrong. It’s already wrong, the moment you finish building it.
The market will move.
Tax law will change.
Your husband wants a divorce.
A diagnosis will surprise you and turn your life upside down.
That’s not a flaw in the plan.
That’s the nature of any model involving the future.
The wrongness isn’t something you can engineer away with more inputs or more precision.
The future is simply unknowable.
Two mistakes
Once you see it this way, two different mistakes often arise.
One is the person who keeps refining the model, running scenario six, then seven, then eight, trying to solve a problem that was never solvable: making the plan perfect.
The other is you, three years ago, building your plan, filing it away, and not opening it since. That plan went wrong the day the market moved or your life changed.
Both are chasing the wrong goal.
One tries too hard to make the model right.
The other doesn’t attempt to make it useful.
What planning is actually for
The real value was never the model.
It’s the process behind it: build the best plan you can with what you know today, decide, then adjust it when the information changes.
That’s it. That’s financial planning.
Accept what you don’t know. Use what you do.
Make the decision in front of you.
Then get on with living and loving your life, instead of living in a spreadsheet trying to account for things that can’t be accounted for.
I’ve written before about why those regular adjustments matter more than the plan itself.
Bottom line
A plan that sits in a drawer is useless.
A plan you keep rebuilding incrementally as life moves is the only kind that stays useful.
That’s the real case for ongoing planning.
It's not that perfect is the enemy of good. It's that the model was never going to be perfect in the first place.
If you’re someone who wants to run yet another scenario before deciding anything, here’s what I’d suggest instead: make the decision in front of you with what you know right now.
Whether that’s when to claim Social Security, when to actually retire, or how much to gift your kids this year, decide with what you have.
You can always update the model next time something actually changes.
Until next Wednesday,
Russ
P.S. — Curious where you land: are you a run-it-once-and-decide person, or is there a scenario you're still turning over in your head? Hit reply and tell me. I read every one.