Surprise!

By Ben Dolan, CFP®

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A good portion of my front yard is pine, oak, and cedar trees. In January of last year, my wife and I decided to take down some trees to make room for a larger grassy patch in front of our house. After the trees were down, I hired a team to install an irrigation system. I was excited to get seed down, water it daily, and watch the yard go from a dirt patch to a lush green field. 

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Things did not go according to plan. Unfortunately, the team I hired to install the irrigation system did not properly connect the main water line to the sprinklers. This caused a good portion of the yard to flood, and my water bill to go through the roof! While the shoddy workmanship was a surprise, it was not the only surprise. After relaying the issue to the installer, they quickly claimed that they knew about the issue, had already fixed it (though they had not), and stopped taking my calls. I think the kids call this getting “ghosted.” I was not prepared for such terrible service, to say the least, and my plan was upended.

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When making long-term financial plans for clients, I always caveat that the plan is likely to go awry. In short, reality tends to get in the way of a good plan. The number of changes along the path, both good or bad, are numerous: job changes, kids, illness, death, inheritance, kids getting accepted to expensive colleges, etc, etc. While we all know this to be true, planning for the plan to not work sounds weird, and can be challenging. 

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Morgan Housel, in his 2020 book The Psychology of Money, directly addresses this issue: “History is littered with good ideas taken too far, which are indistinguishable from bad ideas. The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“unknowns”—are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day” (pg 138).

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Long-term-care is one of those big “unknowns” for my clients. No matter how much family history they have, determining how much money someone will need for care is difficult. Also, end-of-life care is expensive, and increasing at a rate north of core inflation. Most clients do not have unlimited long-term-care policies, and some have none, which means they are self-insuring this expense. In other words, when thinking about long-term care planning, I must leave room for error.

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One way I do this is by not excluding the primary residence of the client (usually paid off by retirement) as an asset to be spent when considering retirement funding. In other words, the paid off home is a second emergency fund should care prove more expensive than originally planned. And since nobody wants to be forced out of their home earlier than desired in retirement, this approach is prudent, providing room for error.

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Knowing that a plan will have to be altered can be unnerving. But with a nice margin of safety, you’ll feel prepared to handle the unknown.