The Planner's Perspective: Inherent Bias

By Paul Morrone CFP®, CPA/PFS, MSA

Maybe you lost 6 pounds (but you tell yourself you lost 10), or your college GPA was 3.45 (but you tell yourself it was a 3.50), or you are really 5’11” but say you’re 6 feet tall. Fortunately, many of these exaggerations make you feel good both inside and out and will never have a detrimental effect on anything in your life. There are some things, however, that you shouldn’t lie to yourself about, and even more importantly, shouldn’t exaggerate to others that are relying on truthful statements to make decisions in your best interest. You wouldn’t simply ‘forget’ to tell your primary care physician that you have been having chest pains, and similarly, you need to be true to yourself and your financial planner about how much you spend and save each year. Remember, the numbers don’t lie!

Your spending habits are one of the main considerations that help determine the viability of your overall financial plan, and material and systemic deviations from the base assumptions can render a plan useless. While it’s nice to tell yourself that you can live off $10,000 a month, if the reality is that you really need $12,000 a month to maintain your lifestyle, don’t lie to yourself and your planner about your cash needs. While you may not like the fact that your money will only last to 85 rather than 90 under the revised assumption, wouldn’t you rather know that ahead of time as opposed to facing a harsh reality when the well runs dry 20 years down the road?

We’ve all heard the phrase ‘junk in, junk out,’ which manifests itself in the planning process as putting together a retirement savings and spending plan is only as viable as the inputs used. Think about it from a long-term perspective. If you say you are going to save $40,000 a year for the next 10 years, but only save $20,000 because you under-estimated your cost of living, you will have accumulated $200,000 less in cash contributions during that time (not to mention potential market performance which could significantly increase the future value of the savings). Furthermore, it’s likely that if you’re overspending relative to your expectations during pre-retirement, then you are likely to continue that trend through retirement.

These problems are further exacerbated during the spend-down phase, when portfolio withdrawals in excess of planned amounts can put unnecessary strain on a portfolio and compromise its ability to fund your retirement income needs for the rest of your life. This could impact anything from your ability to keep your country club membership to being able to stay in your home or receive quality medical care when you need it most. There is no right or wrong amount to be spending, but you should be able to clearly articulate your lifestyle goals to your planner so they can give you a realistic expectation of what to expect. Sometimes the answer may be hard to hear, but time is an investor’s best friend and making changes with 20 or 30 years ahead of you is much easier than if you only have 5 or 10 years left to prepare yourself.

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