For people like me, a need for precision sometimes can be paralyzing. We want the perfect outcomes so badly that we make no decision out of fear of making the wrong one. Thankfully, I have a close friend who is great at catching me in this moment. He knows intuitively that being precisely right is not always best.
Now, I recognize that in some industries, like manufacturing, thresholds of precision are necessary, but retirement planning is not one of them. The truth is, you can never be 100 percent correct when it comes to personal planning for the future, because there will always be levels of uncertainty. For some, the levels are greater. Life is imperfect, and we must accept the fact that we cannot control all of the variables that will affect us. This is why we use assumptions about what your future could look like.
Diversification: An Imprecise Solution
In retirement planning, precision is the enemy of progress and does not allow for a hedge when you are wrong about those assumptions. Take for example a Roth conversion. Knowing future tax rates relative to your current rate, your plans to leave money to heirs, or that you’ll retire in a different state would be a start to precisely determining whether a conversion is right for you. For most of us, however, all of the above is uncertain. Therefore, we cautiously might convert only a portion of our retirement assets to a Roth, rather than 100 percent.
From this vantage point, having the exact precision to determine the “optimum” strategy is far less important than getting the big stones in order—which would be, considering the merit of tax diversification, to hold some assets in pre-tax accounts and others in after-tax accounts. Trying to determine if you should be 100 percent on one side or the other can put you in a position of being 100 percent wrong.
Perfection: The Enemy of Good
As an advisor, my primary job is to reduce the probability of my clients doing irreparable financial damage. My secondary job is to increase their probabilities of success and decrease the levels of uncertainty in their ability to obtain their goals. The question to ask yourself is, “Would you prefer the opportunity to be precisely right or the opportunity to avoid being precisely wrong?” My goal is to help you find the right balance.