Setting Financial Goals Based on Quality of Life BenchmarksSubmitted by Dorval & Chorne on January 26th, 2018
By Daniel Dorval CFP®| Friday, January 26, 2018
This is the time of year when people are receiving year end investment statements and one of the most common questions we get is, “How am I doing?” That seemingly simple question can be challenging to answer because different people want to compare their experiences in different ways. It’s human nature to compare, but part of our value as advisors is to make sure people are making a comparison that is constructive to their decision making rather than potentially destructive.
Some might think in terms of how much they have relative to others. Or we might compare our performance to some arbitrary benchmark (such as the S&P 500 index or maybe even Bitcoin!). Most “benchmarks” are based on numbers such as rate of return, how much I have, what “they” say I will need, or maybe what is considered “normal” or “average.” Numbers can help provide context, but the problem comes in when we use numbers as the basis for our happiness. Numerical benchmarks are usually represented by things outside of our control. From an investment perspective, 2017 was an incredible year which might mean our numbers look good right now, but what happens when market conditions inevitably change and now those positives are replaced with negatives? Now we might be sad or anxious based strictly on arbitrary numbers that are outside of our control!
The answer isn’t to stop making comparisons, but to change the object of comparison to ourselves and things under our control. We as financial advisors want the people we help to think in terms of achieving their own personal idea of quality of life. A definition of quality of life is: the standard of health, comfort, and happiness experienced by an individual. By this definition, numbers rarely provide quality of life! If you have enough financial resources to do the things that bring you personal happiness and fulfillment, does it really matter if someone else has more or that you could have somehow had more?
We recently had a unique client experience that may help illustrate the difference. We had a couple come to us wanting to know if he would be able to retire early at age 55. His job was very stressful and he was burned out! Their dream was to open a small gift shop and bakery just for fun without a focus on how much money they made. In this case their quality of life goals were very well defined because their dream was all about doing what they wanted to do instead of doing what they felt they had to do. We determined they did have the financial ability to make their dreams a reality, but they simply could not afford to suffer through a devastating decline in their retirement assets between now and retirement. For that reason, we made the unusual recommendation of moving nearly all their retirement investments to something that could not lose money. We made it clear that meant they would no longer participate in gains if the stock market continued to rise, but it also meant their dreams would not be jeopardized if there was a serious market decline. Their ability to reach their goals is meeting their own personal benchmark, and that is all that matters!
They followed our advice knowing full well they might be giving away some upside potential (bigger numbers), but would be securing their retirement dreams (quality of life!). In hindsight this couple could always kick themselves if the market does ultimately go up and they could have had more money on paper. However, they can also appreciate they are no longer worrying about their future and can feel secure in knowing they have enough to accomplish what they really want out of life!
On the other hand, we recently helped another retiree that was focused entirely on how much she had in her investments and how much she was making. Her “goal” was to reach a certain dollar amount with her investments which she had accomplished mainly because of recent strong market gains. However, reaching her numbers goal really didn’t mean much to her because it is human nature to want more and now she also had greater anxiety and fear that she might lose what she had gained. She was worried about the recent government shut down headlines and what it might do to her investments. In this case we would argue her focus is not on things within her control to help improve quality of life, but rather her emotions were at the whim of forces completely out of her control and she was generally negative and unhappy as a result.
The natural desire for “more” leads to a scarcity mentality often accompanied by greater anxiety, a more negative attitude, and complaining even when times are good because you never feel like there is enough. The desire for quality of life leads to an abundance mentality generally resulting in greater happiness, a more positive attitude, fulfillment, and appreciation for what we have in life. Keagan recently wrote a great blog piece about New Year’s resolutions where she challenged her readers to share our “quality of life” mindset. We think that is great advice because we are always going to relentlessly focus on helping our clients achieve their own personal quality of life “benchmarks.” We believe that is all that really matters when it comes to financial planning!