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Helping Larchmont Families Plan for the Future

Ian A. Post, CFAFifth Set Investment Advisors LLC • 2065 Boston Post Road • Suite 200 • Larchmont, NY 10538

Email: ipost@fifthsetinvestment.com • Web: www.fifthsetinvestment.com • Phone: 646-783-9717

• Portfolio Management • Financial Planning• Investment Insights

Investment Corner

By Ian A. Post, CFAIan A. Post, CFA

Lately I’ve been investigating new financial planning soft-

ware for use at my firm. While the various solutions have their pros and cons, every solution had one feature in common. They all generated a single number that purportedly gives the probability1 that the client’s financial plan will succeed or fail. The software might generate a result such as “Tom and Mary Jones, you have a 58% chance of funding all your goals.” What the software providers are doing is responding to a market-place that says people want a sim-ple representation of how they are doing saving for retirement. The problem, as Albert Einstein explained, is that “everything should be made as simple as possible, but not simpler”.

A financial plan that results in a single number masks the complexity and uncertainty underlying the outcome.

A recent article in the Financial Analyst Journal, “It’s Time to Retire Ruin (Probabilities)” by Moshe Milevsky2, delineates the issues caused by looking at a sin-gle percentage chance of success (failure). The issues Milevsky raises are as follows: • What percentage of success is

high enough? – i.e. Is a 70% chance of success good or bad?

• Different plans can have the same success percentage, so which one is best?

• We don’t have enough infor-mation about markets or the future to make single number predictions.

• How confident are we in the underlying calculations?

Of course, people do want to know how they are doing saving for retirement so what’s the solution?The solution to this problem is twofold.

First, we must accept the uncertainty involved when planning for an event that, for a forty-year-old, might extend fifty to sixty years into the future. Developing precise estimates of variables ranging from income to inflation to investment returns, not to mention typically unpre-dictable events, such as personal health issues and macro events is effectively impossible. While not a reason to avoid planning altogether, it is cause to take a broader view and accept that there is a wide range of possible outcomes.The second step is to develop a plan that illustrates uncertain-ty and focuses on a range of possible financial outcomes. My conversations with clients will go something like “given where you are today and if you contin-ue on the path you’re on, what’s a reasonable range3 of possible retirement (or college) funding outcomes.” If those outcomes

are generally less than you think you’ll need, then we can focus on the levers you can push and pull in order to adjust the plan, i.e. save more, spend less, invest more aggressively4.While financial plans that illustrate uncertainty and raise awareness of a wide range future possibilities might be somewhat less satisfying than single number explanations, they offer a more realistic and practical result from which informed financial deci-sions can be made.Fifth Set Investment Advisors LLC is a registered investment adviser. Infor-mation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific secu-rities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser, tax professional, or attorney before implementing any strategy or recom-mendation discussed herein.

Larchmont resident Ian A. Post, CFA is the Principal of Fifth Set Investment Advisors LLC. Fifth Set is the result of his evolution of thought in regard to conventional investment management. His experience and education led to research for a smarter approach to portfolio management and financial planning. Prior to Fifth Set, Ian conducted fundamental equity research at Citigroup, Credit Lyonnais and CIBC Oppenheimer. Ian earned a BS in Engineering and Public Policy from Washington University and an MBA with concentrations in Finance and Statistics from NYU and is a holder of the Charted Financial Analyst designation and a member of CFA Institute.

1 Many retirement calculators generate a dollar savings goal rather than a probability of meeting a goal. 2 Moshe A. Milevsky is an Associate Professor of Finance at York University, Toronto.3 Using a method of forecasting called Monte Carlo Simulation. 4 This option can also make things worse.