With the end of another calendar year approaching, it’s a good time to reflect on the events of the past year and to formulate strategy for the year ahead. Over the next few months, the various popular media and anyone involved in personal finance will be publishing stories about new rules and limits, with advice on how to turn these rules to your advantage.
The problem with this obsession with detail is that it encourages you, by example, to ignore the big picture. It pretends that everything is equally important and that context is irrelevant to financial decision making. Detail can be important, to be sure, but too much focus on it can lead to problems and unpleasant consequences. As with most everything financial, the importance of detail is relative, not absolute. The question is not: “Should I be concerned with detail?” The question is: “Where will my limited resources — time, energy, money, worry — be best spent?” In my experience, most of what Americans believe to be true about financial management and investing is learned from mass media sources, and the vast majority of that is advertising. It’s like the hens trusting the foxes for advice!
Media coverage of personal finance topics tends to be brief, attention grabbing, and very specific. This can lead to a preoccupation with detail that can be easily explained in the limited space of a magazine column or program segment, but which is mostly irrelevant to your ultimate financial success.
This problem is especially common in the complex world of federal compensation, benefits and retirement rules. There is a lot of attention devoted to explaining these rules and trying to provide guidance for turning them to your advantage. But often there is little made in putting this advice into the context of your bigger financial picture. To be successful financially, however, you need to stay focused on the things that matter — things that will make a difference in the long run.
A concept I use with my clients is what I call planning relevance. Planning relevance is a relative measure of the likely impact that a planning factor, such as a savings contribution or rate of return, will have on your financial life. Planning relevance indicates the relative importance of an event in the grand scheme of things.
A key to successful financial planning and management is to focus your energy, resources and concern on factors that are important to your ultimate success. I define financial success as meeting your reasonable lifetime financial goals.
I meet too many federal workers who are overly concerned about details and rules, while ignoring opportunities and threats that will make or break their financial futures. Worrying about whether to direct your TSP contributions to the Traditional or the Roth account is an example of a trivial concern. The important thing – the thing with high planning relevance – is that the money gets saved in the first place. Where it is saved is usually incidental in the grand scheme of a financial lifetime.
I suggest that you consider the planning relevance of anything financial about which you may be concerned or considering for investment. In general, the larger the dollar amount of the event or factor in question, the greater the planning relevance. Similarly the longer the duration of a series of events continues, the greater the planning relevance.
A one-time withdrawal of $50,000 from a portfolio of $500,000 – 10 percent – will have a fairly high planning relevance, while a single $1,000 withdrawal will have a fairly low planning relevance. A series of $1,000 annual withdrawals from this portfolio lasting 30 or 40 years, particularly if adjusted for inflation, would have a moderately high planning relevance, since, although the amount is small, it is repeated over a long duration and totals $30,000 or $40,000.
The exact amount of planning relevance isn’t important — what’s important is prioritizing your efforts and directing your attention to the most significant factors to be considered. The first step in planning ahead financially, whether for the coming year or the next 40 years, is to identify and prioritize the factors that will have the greatest impact on the end results.
In my experience, if you make a list of everything you might consider paying attention to, and then rank them from most to least important, the top five or six factors will determine how you ultimately succeed or fail.
Written By Mike Miles
For the Federal Times
Publication December 7, 2015