Ep #106: What is Likelihood of Success & How Can It Help Our Clients?

Benjamin Haas | Oct 25, 2023

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Benjamin Haas 00:03

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hey Adam, welcome back to your podcast.

Adam Werner 00:29

Hey, thanks for having me on your podcast.

Benjamin Haas 00:35

We are cruising into the fourth quarter here. There's a lot going on in the world but we're going to continue to, I'll say, share some thoughts on our end with how we go about taking all that's happening in the world and all the relationships we have and funnel it into this thing we call financial planning. So yeah, that's the plan today.

Adam Werner 00:57

Fun stuff, isn't it?

Benjamin Haas 01:00

Yeah, if you are a consistent listener, our last one was on this concept of whiteboarding, like, how do we actually go about the process of planning? I enjoyed that conversation. I hope others did, too. But I think today, we kind of want to take the next step, if that's a fair way of putting it. If people come to us with a fire, a decision they need help with, something we do is this whiteboarding process. We have this plan, we help them try to implement it and then boom, life happens, right? We could go through that listening litany of things that happen in people's life; you get the next big decision needs to be made or life gets in the way, markets go bad, you have high anxiety moments. There's anything, right? No plan goes to plan. Right?

Adam Werner 01:47

Right. I guess we can look at this through the lens of like two different scenarios. We were doing, I'll say, an initial plan, when we're first guiding someone through that planning process. Ultimately, we go through our planning tool and there's a likelihood of success in the simulation that puts out just zero to 100%. How close are they to kind of achieving what they say they want to achieve their goals and financially are they on track? That can happen in that initial process but oftentimes, once you kind of go through that initial planning process, you're kind of in, I'll say, like maintenance mode, where we're still checking in on things, we have this to-do list and we're making sure things are on track. But as you said, you can't just kind of set it aside and say, well, we did all these things initially upfront and now they're done. We just wipe our hands and that life is just going to be grand moving forward, we have this plan, and we're just going to follow it to a tee, nothing's going to change, or we're just going to be happy as pigs in you know what moving forward. So oftentimes it is going back to maybe not necessarily that original plan, but as you said, there are these inflection points. 2022 is the perfect example from a market perspective, investment returns just being bad across the board. Going back to that planning tool and going back to that likelihood of success to really see, yes, it feels bad in this narrow snapshot in time but did it really move the needle? A whole heck of a lot we're still projecting out, you know, 25-30 years, is this just another data point that was factored in and am I still on track? So, I think it is interesting to kind of look through that lens as a way to kind of just get a little bit more perspective, again, when maybe you haven't done planning and a little bit, to just give yourself some peace of mind. Or, if it's not looking good, then at least you now know I can make a pivot, I can adjust when I need to adjust.

Benjamin Haas 03:49

So, I liken this a little bit. Personal story, I hope it's okay to share with you and all your friends listening. You know, big believer in the coaching process and having somebody in my life that unable to work through, will say plans with, and for as optimistic a person as I can be. I am going to speak for her here and if she listens to the podcast, she can call me out on it and I'll apologize. But I know I can be annoying because we'll make some sort of plan and then in my head I'm going to like slow down and audibly sometimes say to her, yeah, but what if this happens? And then what if this happens, like I start to think of all the things that can go wrong and I think that's somewhat natural when you're making plans if you're really trying to be efficient about it. So, bring this all the way back around the title of the podcast, how does this idea of likelihood of success hopefully change that conversation? And we should talk about what likelihood of success is but that's really the goal here. Is there an interactive way for you or I, and Holly with our clients to sit down in the conference room with them, put all this data there, try to poke holes in this, whether it's a made-up situation in your mind or something that's right in front of you that you need to decide on. Be able to go through it so that those “yeah, but” or “I don't trust this” or “I don't feel like this will work” that we can start to try to put some of those things aside or calm those fears down.

Adam Werner 05:26

So, we will get into the likelihood of success. I'll go through that. But yeah, I think sometimes it is just those what if’s or those complete unknowns that just talking about them and starting to figure out, okay, well, if this happens, what are my options and sometimes you don't necessarily have to have all the answers, it's just to know that there are options out there that I'm not just going to be flying blind. That in and of itself sometimes is enough to just ease that kind of wave of anxiety that if something like this happens, maybe it won't be completely devastating to my plan and then to my life, as long as I know that there are other ways that I can address it, if it ever happens. Sometimes we've seen that, you know, that's enough just to have people verbalize it, get it out of their head, right? Then, like you said, poke holes a little bit in what is this going to look like? And we can start to guide and say, well, if this happens, then here are your choices or here's what could work for your situation and hopefully, it still works out in the plan. That likelihood of success is still high enough that they feel confident that okay, that was a concern in my head. But now that I see it, it may not completely go away but I'm not as concerned about it as I was when I first started talking about it.

Benjamin Haas 06:38

Yeah, and the beauty of likelihood of success that we really want to share today is we can model what a change would look like and maybe it is I'm feel like I'm now pulling from recent situations. Right? Maybe it is. The world is so crazy, I feel like there's nothing in my control, my investments aren’t in my control. If I do something different, I'll feel better. Well, let's model it because it's a completely rational thing to want to avoid anxiety but that can be a very costly decision. So let's try to quantify that and this likelihood of success tool, I think just really does a good job. Breaking down the barrier between us and our clients and what could be just financial jargon, or we're going to throw all the stats, we know what we're doing. It brings them to the level playing field with us to let's just dumb it down to a number. What maps out best case scenario for you? All right, I feel like we've gone through half the podcast and I've talked about Monte Carlo and eMoney.

Adam Werner 07:39

So, let's go into the likelihood of success. What does that actually mean to us? How do we figure that out? So we use a planning tool called eMoney and within eMoney, there is a section called the Decision Center where we have all these different variables that we can mess with, adjust, adapt, and throw in all these different what-if scenarios and ultimately run what is called a Monte Carlo simulation. In this tool, it's 1000 Different randomized trials. So, we're taking away some of that straight line, like linear variables. Think rate of return on your investments we know that we would love, right? Can you imagine a world, Ben, where if we just said, hey, we're shooting for 6% rate of return year over year, and every single year, that was what you achieved, it would make planning pretty darn easy. So, we know that doesn't happen in reality. This tool is essentially using some backdated historical data, to randomize some of those returns to mimic and short real-life example, match just one right inflation, we can put in different levels of expenses, things like that, just it gives us the ability to poke more holes and not just assume that everything is going to be static, the assumptions we're making the plan are not, you know, again, linear in fashion, and that it's going to stay that way forever.

Benjamin Haas 09:20

Yeah, this is what makes it not just an online calculator or not, right. Look, I'm a lover of spreadsheets, but this is this is not a spreadsheet where you are working with specific data that you are making assumptions straight line on.

Adam Werner 09:28

Yeah, now the tool when we say likelihood of success, the tool is defining success or the simulation of success is having at least $1 of liquid assets so, investment assets leftover on the day that you pass away. It is kind of black and white in that sense that if you run out of money at some point before, whatever that life expectancy is that we're making an assumption on in the tool. For us, it's usually age 95. So, if you run out of money before age 95, that looks like failure in the eyes have the tool. So, it's going to run these 1000 different trials and if you passed 900 of them with $1, leftover on the day that you pass away, you have a 90% likelihood of success, meaning, nine out of 10 times you're going to be perfectly fine, you're going to have at least $1 left your name when you pass away and for us, that's success in the eyes of this tool.

Benjamin Haas 10:23

Love it and what it helps us do taking that just one step further, when there are specific planning discussions to be had or even decisions to be made. You know, think of maybe the reasons why people would come to us, when can I retire? You know, a timeline? How much can I spend? What rate of return do I need? We often get the should I pay off my mortgage, or shouldn't I? When do I take Social Security? These are all examples of things that we can now model out. What if we retire at 62 versus 65? What if we spend $120,000/year versus 150? What all those what ifs? We can isolate those variables and run different scenarios and then see how that likelihood of success changes?

Adam Werner 11:06

It's so to that end, and you can I think you said it earlier, right? Like, what rate of return do I need? It's, interesting because we can essentially isolate singular variables, start to change numbers, and then see what that impact is. Now we know usually, it's not that straightforward, right? If you're changing one variable, that may mean some others are affected too, there's dominoes, there's tradeoffs, everything. But it's just a nice way to kind of frame the conversation and do that interactively with the client. So yeah, I'm not sure where I was where I was going next.

Benjamin Haas 11:43

Well, my thought is, let's, you know, going back to the title of the podcast here, how does this tool, how does this exercise that we do kind of changed the situation? I'm wondering if we don't just get into storytelling mode here, you know, you pick one, I'll pick one, you pick two, it doesn't matter. Let's use our time and maybe map out a scenario that we remember sitting in that conference room, we're sitting on Zoom, however, we've met with this person and say, let's go back to the tool and how that we think really affected them in a positive way.

Adam Werner 12:17

I think the one that comes to my mind is going through a year like 2022, from an investment standpoint, made a lot of people question. Am I still okay? Right, you're opening up statements, there was nowhere to hide, stocks were down, bonds were down. We've talked about that in numerous podcasts but I think that the fact that bonds did not hold up and didn't do their job as diversifiers, there's many reasons for that, hurt a lot of people's kind of psychological, you know, relationship with their investment accounts. We understand that the stocks are going to be volatile over time, it was the bond side I think that really punished people. So, we had many conversations of, I see my statement, I'm seeing my values fall, I retired, put in a date, but it felt more visceral for people that had retired very recently and were relying on their investments for withdrawals, and now feeling like, oh crap, do I need to go back to work? For us, just to kind of go back into the decision center, to go back to this Monte Carlo simulation and say, yes, we know stocks are down, 20%, bonds are down over 10%. But when we go to that decision center, we can still see that your likelihood of success went from maybe it was 91% and now it's showing, you know, 87%. Yes, it didn't go up but it wasn't catastrophic, we don't think it's going to lead to a drastic change in your lifestyle, we have to get on the other side of this. But I think even just something as simple as that, just to see the bigger picture, right? We're looking now long term again and not just this very short window of time where just nothing really felt positive. Yeah, sometimes just zooming out gives a little bit more perspective on kind of that long term. We know that over time, we're going to have bad years in the market and that just happened to be one of them. It was enough to just have those conversations and kind of hold people's hand through that this is okay. We planned for this. Right that the whole point of that Monte Carlo simulation is not straight line returns again but just being able to kind of see that was oftentimes enough to just take that first layer of anxiety off the table.

Benjamin Haas 14:51

So that's well said because I'm reliving some of those conversations. I'm remembering one of them in particular where you know it then led too, okay, but I really like being in, this is going to sound silly but I really liked my likelihood of success being in the 90’s. Like, now I'm in the 80s. Like, what? So now if we reduce your spending by how much what got us back then right, you can start to play with these dominoes and when you saw the annual spending needed to go from making it up now, but it was something like this $120,000 a year to $116,000. Right? Like, that feels so minute and we know that the next time we have returns that are better than we anticipated. We're going to be right back there. So, I remember you saying it last year, when in doubt, zoom out. It's hard to do in the moment but I really like that. That's probably a great example of where that likelihood of success, we can just go back to it and see where it was. We run that report annually. We're just talking about that today. We'll run it again on December 31 so we can archive this and show people how it changes over time.

Adam Werner 15:56

Yeah, and I guess we should have said this earlier. It's not like we're relying on that likelihood of success as you know, it's not the be all end all. It carries some weight but we're not just relying on that as well. The tool said this, so you're going to be fine. Yes. It's more just to again, frame the conversation and let's just talk through it. Again, we're not relying that on as a pass fail, and yes, you're going to be fine or no, you're not. There's so much gray and as you said earlier, there's so many assumptions built in to those projections. But that's why it's important to review regularly too, because had we been having the same conversation three years ago, we probably wouldn't have factored in a high level of inflation that we've been seeing recently, either. So it's good to revisit even without particular triggers.

Benjamin Haas 16:54

What's kind of sticking in my head is still that just that idea of tradeoffs on how a client may focus on one variable and then we're able to go, okay, well, let's see what we need to do with these other variables. Right, and I go back to those situations where somebody has maybe a timeline for retirement but they don't love it. Work has gotten more difficult or expectations on me have gone up but I don't feel like I can retire. Well, let's jump back into eMoney together. I know we had you retiring at 65, you're 62. Now, what would need to be different? And maybe it was as simple as saying, all right, well, maybe I don't need to work full time for one more year or three more years if I'm willing to kind of putz around part time for a multiple of that. Right? Is this a tradeoff I'm willing to make? That's an example where again, the likelihood of success may look different. I mean, may look the same under two different scenarios that we build so that we can just have a conversation on. Okay. How does this feel? What do you like or not like about this? It generates the conversation.

Adam Werner 18:05

Yeah, I love that one so much because so many conversations, especially around that retirement planning idea and that timeline. Thinking of a few people in my head that just you get to the I don't say the end of your career, but you get that close to retirement, and with how much the workforce has changed, and how much that work environment has clearly changed these last few years, where I think I'm seeing more and more people that are that trying to decide, as you said, at the tradeoff. Do I just work one more year, part time in a job? That's really tough? I don't love it anymore. It's harder and harder every day. Or is it even possible for me to step back, do something part time that I enjoy more, maybe get some of my time back, ease into retirement a little bit, even though I may end up having to work a little bit longer. But if it's something I enjoy, I don't necessarily feel that crush of a Monday morning, that sometimes is enough for people to make that decision. Even if they decide, you know what, I'd rather just work that one more year, I can get through it for a year. I know, it's not going to be the most fun thing, but I can get to the end of that, and then I can fully retire. Again, it's all about perspective to make those decisions and I think that's what planning is all about for us. It's just kind of prioritizing, giving those options and trying to figure out just what's going to work best for somebody. But ultimately it comes down to education. We're not giving somebody the answers so much as we are just helping them through that thought process and helping them figure out what's best for them. We're not making that decision. We're just kind of giving them the tools to figure out for themselves what's going to work.

Benjamin Haas 19:51

I love the fact that it does boil down to that one number. So, without us having to like financial plan upon them and do all these mathematical things that we can do with the calculator and spreadsheets and blah, blah, blah. That's not the point. The point is, situation a, you've got that 91% likelihood of success, situation b is 90. Okay? Now it's coin flip. Now, what do you want, which one of these situations feels better, it dumbs it all the way down to like, focusing on one thing, and I really enjoy this. These are probably the most rewarding conversations that we can have because usually get to the end of that, and all that anxiety of not knowing what would happen if they do something different, you know, starts to go away.

Adam Werner 20:36

That's just planning in general for us. Right? When somebody comes to us, and paralysis by analysis, but sometimes it's not even that, it's a complete blank sheet of paper. I don't know what I don't know and I'm afraid to make a decision one way or the other because I have just no idea how these dominoes can fall. If I make this one decision, I just don't know what the other fallout from this decision can be and I'm very hesitant to make this decision because I just don't know what the outcome can look like. I think that's exit. Clearly, that's my bias but that's where I think we're valuable to just explore what's out there and use our experience and expertise to help narrow down some of those options. So do we want to go into another one?

Benjamin Haas 21:26

You got another one?

Adam Werner 21:28

Yeah, it's a recent example. I think we talked about it on another podcast to I don't know if that was the rent or buy your fun one, but buying a second property or in this instance, you know, buying a place at the beach, it was what's the best way to pay for it? Right? Have investments, have cashflow? Do I take a mortgage? Do I not take a mortgage? How much do I take out of my account? What am I taking from savings, just putting that puzzle together. And, you know, financially, everyone's got their own preferences on debt and what they're comfortable carrying from that side of things. We know that with a mortgage you're going to pay interest over time, all of that said, being able to put these different scenarios in the planning tool, run the different simulations and see that likelihood of success again, just to kind of isolate this scenario looks like this. This scenario isn't wildly different but here's what the likelihood of success looks like. Does it make sense to take more out of my investments today and not carry a mortgage? Or does it make sense to carry a mortgage and leave my investments intact and use that to help accelerate payments over time? It's just the way that we can kind of model things. Again, it all just comes down to framing the conversation, giving some additional perspective and enough education, that anybody can then feel good about whatever decision that they make.

Benjamin Haas 22:51

Right, because what would you do different in your life? This is a rhetorical question unless you really want to answer. What would you do different in your life? I'll put myself to what would I do differently in my life if I wasn't thinking about the negative dominoes or I wasn't thinking like, what is the most responsible thing to do? Would I spend an extra $5,000 trying to finish the basement right now in a way that I know that we'd probably enjoy later in life? When I often think I'm probably not putting enough away for college education right now. So, to be able to step like everything to be able to stack everything in that tool and be able to isolate one thing and then see the Domino's I think that was what I was taking away from this whole, do I spend a chunk of money, whether it's beach house or anything, whatever? What are the dominoes? What are the unintended consequences of that? And if I have my planners help in being able to talk through what those things are or what those things aren't, I'm going to feel more confident. I think just doing the thing that I feel best about right now.

Adam Werner 23:50

Yeah, and it's interesting that the thought that just popped into my head and I don't know that I ever had this thought before in my life, but I think it can help. With the people who are on the extremes in terms of how they approach decisions and I say that meaning, I think about myself and just that scenario you laid out, I am very much a how can this go wrong before I make a decision? Right, I'm focused on the house is going to go bad, how do I want to prepare for it? And, you know, again, I think that just speaks to me as a planner. Right? That's why I think I do this but we certainly have clients that think that way too. I think that's why going through this process is helpful because you can start to quantify the impact of some of those what if’s like, how can I go wrong scenarios, but then I think it also works on the flip side for people that don't necessarily worry too much about what can go wrong. There's absolutely nothing wrong with being an optimist, right? And just kind of going through life that it's all going to work out and I'm just going to keep doing my thing and it's worked so far. But I think that's where again, those people are harder and harder to find, by the way, they're probably much happier than I am, too but that's just my neuroses. But it's for people that may not necessarily worry too much about that that again, it's just making sure that there's not something kind of lurking behind the corner that isn't planned for, maybe they're not worried about, but if it's something from our aspect that is meaningful to be planned for in the conversation and it just gives us that perspective to be able to have the conversation.

Benjamin Haas 25:35

I think that's a great summary. You know, if you could dumb it down to, what is this tool most for, if that context, and I'm glad to use the word like, quantify the event in terms of, hopefully much longer-term success. It's good that some people are good people, but some people need hard data. They need to be reassured in some way and this is a data way to do it and it's just understanding the tradeoffs. You make the best decision that you can and then you get prepared to change again. Life will throw another curveball.

Adam Werner 26:08

Yeah, always does.

Benjamin Haas 26:10

So, thank you. We've now whiteboarding, likelihood of success. We'll have a third one in this little teaser. Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

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Ep #106: What is Likelihood of Success & How Can It Help Our Clients?