Financial Planning doesn’t work! That statement may surprise you, but let me explain. Several years ago ING ran a series of commercials showing people walking around with a number under their arm. The number was to represent the amount of money each person would need to be able to retire. This is the epitome of financial planning. It is based on a belief that when your net worth reaches some magical number then you will have sufficient money to retire. At that point all you have to do is live off the interest and growth generated by your assets while never touching your principal.
That sounds like a great plan! So what’s wrong? Financial Planning is based on the use of a net worth statement as a measurement of success. A net worth statement is nothing more than a personal balance sheet. Ask any business owner what value a balance sheet has in running their business. They will tell you not much!!! To be successful in business you have to learn to manage cash flow! In retirement you need cash flow to pay your bills. An estimate of how much your assets are worth is of little value unless those assets can be converted to a cash flow that lasts for a lifetime!
Let me paint you a scenario that proved to be all too common. Say you and your spouse achieved your financial goals and retired in January of 2007. You had a $2,000,000 investment account and a $400,000 home that was free and clear. You could comfortably generate an additional $60,000 annually from your investment account without the fear of spending your principal. This added to your social security and with no debt leaves you able to enjoy the lifestyle you had planned for all your life.
So less than two years later, after the financial collapse of 2008, your investment account is down 35% to 50%. The value of your home has dropped in half, but even more importantly so has your equity. All that cash you felt was safely stored in your home! Realty hits home!!! You either have to seriously alter your lifestyle or go back to work!!!
Let me ask a very basic question. If cash flow is what we need in retirement, why spend our entire working careers accumulating assets? Why don’t we plan for cash flow from the beginning???
The answer to that question brings us to the fact that financial institutions are paid fees and commissions to help you accumulate assets. However when it comes time to retire and you want your money back, they are of little help. They haven’t figured out how to give you a never-ending cash flow and still get paid!!!
This is just one of many issues that prevent us from being able to retire comfortably. Ultimately the key lies in understanding how money works! Unfortunately what most of us believe about money we have learned from the very people who profit from us not knowing!