What are the critical elements that lead to a successful financial plan? A successful plan must include the four factors below.
Risk Adjustment for Volatility: This is a very real issue these days. We cannot assume that our portfolio will see smooth, average returns; the markets today do not behave that way.
Since markets will inevitably experience crises, the more realistic approach is to plan in an early bear market or other crisis early in the portfolio’s life span. While we hope that the worst-case scenario will not occur, this more realistic approach is a form of stress-testing the portfolio. If we account for negative or poor returns early on, we can take actions such as reducing withdrawal rates early on or using flexible withdrawal rates, increasing cash buffers or bond allocations and reducing equities in the portfolio. These steps will help to ensure that the plan does not break down and the investor runs out of money.
Why this matters:
Sequence of Returns Risk: A plan must factor in the order in which returns occur, as a significant loss early on is far more damaging to long-term survivability than a similar loss later on, i.e., early losses hurt more because they reduce the base that future gains compound on.
Recovery becomes mathematically harder (e.g., -50% requires +100% to break even). Even normal returns after the crisis can’t catch-up.
Not adjusting withdrawals during downturns and immediately afterward can amplify the damage. Losses + withdrawals early = less capital left to recover.
Scenario Analysis: Effective planning involves running multiple simulations —such as retiring later, unexpected income changes, or major life milestones—to determine the probability of achieving goals under various conditions. Other ideas include factoring in inflation-adjusted withdrawals, comparing the effect of different withdrawal rates on the portfolio and adding to cash as a buffer against emergency withdrawals during a downturn.
Focusing on Controllables: A successful approach prioritizes what can be managed, such as asset allocation, savings rate, tax efficiency, disciplined rebalancing and behavior during downturns. These drive the majority of long-term results.
It is in our best interest to ignore what cannot be controlled - daily market movements, election outcomes, central bank speculation and media narratives.
Please feel free to call (215-836-4880) or email the office (ellend@regardingyourmoney.com) to set up an appointment to discuss any your plan or any financial questions you may have.
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