Always a Trade-Off

Given recent experiences, I have trade-offs on my mind.

Investing and life are a series of trade-offs. Every day we are faced with a series of decisions on how to spend our resources, including time and money.

My expertise is in how to best allocate monetary resources. Maximizing these resources can help families and nonprofits reach their goals. It can help them plan to buy their dream home, dream vacation or enjoy their golden years. There is typically a solid, financial plan that will get people to retirement or to other goals, like putting kids through college.

The process seems deceptively simple at first, because math and finance are factual and typically definitive to a certain level. Enter a client’s personal data, income, goals for retirement, etc. and out comes guidance on the most optimal saving rate and timeframe to save. You either can or cannot retire at 65 (possibly change your plan so you can); you either should or should not take Social Security early.

However, as we all know, life is neither simple nor guaranteed. Rather, it can be messy and unexpected, thereby creating competing goals. The key is to compromise and set priorities, just like everything else in life.

People tend to pay more attention to their immediate needs, and sometimes wants, in life. The scenario that I hear the most from clients is “I could be hit by a bus tomorrow.” Of course, no one knows what is in store in the future. However, creating a balance between the here and now and your future is prudent. It should be customized to your individual situation, taking into account your and possibly your partner’s health and family longevity.

Part of the customization comes from the “how.” How do you really want to spend retirement? I have many clients who want to travel every year. What would that look like for you? Would you rent or buy an RV and travel inexpensively? Would you take a flight to the tropical location of your choice? When you decide what your wants and needs are, the planning can take place. You can then be prepared to change your expectations of retirement if the situation warrants.

Clients also have differing priorities. Recently, I had several meetings where the age difference between spouses was larger than usual. The wife was at least 15 years younger and the husband was at a late retirement age. Their priority was to retire together to maximize their time together. Special planning was required in order to allow them the freedom to enjoy their time now and minimize their worries for later. In this scenario, a lowering of lifestyle was chosen so that more time could be spent together. The decision: You can always make more money but you can’t make more time together. That’s the trade-off and making the right choice comes from where your priorities are. In reality, there is no right or wrong answer. It’s a matter of knowing the consequences, advantages, resources and priorities and helping people work through those to reach their individual plan.   

The big trade-off in investing is risk and reward. The U.S. Treasury is considered a “riskless” investment because the U.S. issues these securities and is considered the highest rated issuer. From there, the return you get on equities is considered the “equity risk premium.” The theory is that the returns that you should receive over time from equities will pay you for the additional risk that you take. The perfect mix is the maximum return you can get for the risk you are willing to take. Returns are based on the premium over riskless returns so given the current low rates, more risk must be taken on to get higher returns. As people live longer in retirement, the need to continue to take risk into retirement is a reality as inflation pressures could take away buying power over this long time frame. A balance of risk and return is important and will change over time for most investors.

We all live a trade-off every day, from how and where we spend our time to how we spend our money. The key in both is to set your priorities and make sure you spend your time and invest money to your best advantage.