The behavioral and emotional side of financial planning takes precedence when planning for our future.
I see this play out frequently in the form of anchoring to a perceived value we’ve grown accustomed to, based on prior experience.
This “value”; however, can unfortunately lead to decisions that damage the success of our financial plan. Here are some of the top examples we run across:
Outline of This Episode
- [1:40] Anchoring to a dollar amount is what we’re used to
- [5:56] Are you stuck on your stock prices?
- [10:25] Your retirement number needs to have a basis
- [15:20] What are you sacrificing to reach your number?
- [16:13] Don’t limit your tax thinking
- [20:25] Gain confidence with a financial plan
Delaying a car or house purchase because the market is “crazy right now”
I’ve heard this for years now, but especially so over the past 1.5 years as result of the pandemic. With supply shortages across many industries, prices have jumped and caused second guessing if now is the right time. We’ve anchored to what an acceptable price per square foot a house should cost, or how used cars shouldn’t be as expensive as new cars etc.
While these decisions shouldn’t be made without prudent thought, we don’t know if these prices will revert to “normal” or if these higher dollar amounts are here to stay. If your financial plan allows for the purchase of such items even at the higher dollar amount, then give yourself the permission to act on it!
Stock price of individual companies
Most commonly I see this with employer stock where previously you may have bought in at X price, or your RSUs vested at X price and now you expect all future grants/vest periods etc. to be at least that price or higher. Ideally of course it works out this way, but what if it does not?
Particularly over this pandemic period, we’ve seen some volatile swings in certain sectors of the market causing some company stock to reach record highs, but also come crashing back down to Earth. This creates questions like:
- How long will you wait for the price to get back to those highs?
- What impact does this have on your financial plan if you’re right?
- What if you’re wrong?
- Are you willing to make the changes necessary to the rest of your plan if you’re wrong?
With new clients who haven’t been through a financial plan before they first engage with us, many will throw out various dollar amounts of how much they want to have when they retire – $750k, $1m, $5m, $15m etc. Their question then becomes what should my “number” be – think back to those ING commercials.
In realty what we typically find is that “number” ends up being a target that keeps getting pushed out further as lifestyle creep occurs with increasing income throughout your career. That $1m you thought you needed turns into $2m and then $2.5m etc.
Another retirement goal is to have $0 debt when you retire. Of course, this sounds great and would be ideal, but what if this causes complications to other areas of your financial plan? Like:
- having the flexibility to pay for your kid’s college
- or moving to a more desirable location in retirement
- retiring early in your 50s and need non-retirement account funds to pull from
Is having no debt, more important than reaching the goals above?
When should you Retire?
A bonus retirement arbitrary number while not a dollar amount still applies is the age in which you retire. Whether its 59.5, 60, 65 etc. many clients are pleasantly surprised to hear they can retire sooner than their arbitrary number. But many have an anchoring bias that makes it difficult to proceed with retiring prior to that date. Once again, if your financial plan allows you to do it, then give yourself permission to make the decision!
Your tax goal should not be limited to this year
Taxes can be an emotional area of our financial lives, yet each area of our financial decisions affects our tax liability. Usually what we remember about taxes is either having to write a check or receiving a refund.
Most people plan their taxes each April. However, it is more important to remember that the goal should be not to reduce the taxes you owe this year, but rather the taxes you owe over your lifetime. Listen to learn how you can reduce your lifetime tax liability.
Planning Creates Clarity
The biggest takeaways I have with these examples are setting the appropriate expectations & plan for what to do when certain events happen, such as a vest date for your employer stock. Go ahead and have a plan in place that you are either going to hold onto the stock or immediately sell. This way you can plan around that for the other areas of your financial life.
Also, “listen” to your financial plan and if you want to purchase a certain item that is well within your target amount and time frame set forth in the plan, then do so! Even if the current price is more than your perceived price of such items.
Another thing to consider is your “financial plan” isn’t a one-time project. It’s really an ongoing plan that needs to be updated as more details become clear. This helps you narrow in on the correct path to accomplish those long-term goals.
Resources & People Mentioned
- BOOK – Wild Problems by Russ Roberts