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What is Comprehensive Financial Planning?

A reader writes in, asking:

“I’m currently ‘in the market’ for a financial planner. I’m looking at many different options, because I’m still a little unsure about exactly what I’m looking for. One phrase that I keep seeing is ‘comprehensive financial plan’ or other similar wording. What exactly would that include? On the one hand comprehensive sounds good. I don’t want anything important left out. But I also worry about the possibility of overpaying for services that I don’t really need.”

Financial planning includes several sub-topics. The following list is from the AICPA’s Statement on Standards in Personal Financial Planning Services. (Different sources have slightly different lists of sub-topics. For example, some omit elder planning or charitable planning.)

  1. Cash flow planning
  2. Risk management and insurance planning
  3. Retirement planning
  4. Investment planning
  5. Estate, gift, and wealth transfer planning
  6. Elder planning
  7. Charitable planning
  8. Education planning
  9. Tax planning

Of course, for a given household at a given time, not all of those topics will be equally important.

But, whether you’re doing your own planning or working with a professional, those are the topics that should be addressed on an ongoing basis — unless there’s a clear reason to exclude certain topics. (For example, if you have no kids, no plans for kids, no student loans, and no plans to go back to school, you have no need for education planning.)

The truth is, there’s no way for one person to have a deep level of expertise in all of those topics, even if the person is a full-time professional with a ton of letters behind his/her name. There’s simply too much material.

Ideally, the financial planning field would work like the medical field in this regard.

For instance, there are outpatient dermatology practices that do what they do, and they’re good at it. But nobody at such a practice is going to perform your colonoscopy. And you know that without even needing to ask.

And there are big hospital systems. They have radiology, oncology, anesthesiology, you name it. But it’s not one single professional doing all of those things.

And with regard to the individual physicians, there are specialists with clear areas of expertise. And there are primary care physicians who know something about all of the various specialties, but they recognize the limits of their expertise and they regularly refer out to specialists as necessary.

Ideally financial planning would function similarly.

There would be broad financial planning practices with a team of professionals with expertise in various areas, with the goal of keeping everything “in house.” And there would be smaller practices, specializing in various areas and regularly referring to each other.

And financial planners (and financial planning practices) would make it clear that they do offer this and they don’t offer that.

What makes me nervous are the solo practitioners who offer “comprehensive financial planning” and rarely refer out to other professionals. I do not understand how a person can in good faith assert that they have deep expertise in all of the above topics.

Investing Blog Roundup: Where to Find Prior Bogleheads Podcasts, Videos, Interviews, and More

A reader writes in, asking:

“Is there a hub with a list of previous educational Bogleheads meetings that gives access to listen to them? I think I found it in the past and even listened to or read notes, but this was a few years ago, and I cannot recall how I found that place either.”

Yes, there’s a new such resource in fact. The Bogle Center (formally, The John C. Bogle Center for Financial Literacy) has recently had its website redesigned, to serve as a hub for all of the Bogleheads educational resources. You can find it here:

Just below the large banner with the photo of Bogle himself, you’ll find links to the podcasts, Twitter Spaces interviews, YouTube channel, etc.

You’ll also notice that there are still some available tickets for the 2022 Bogleheads Conference, next month in Chicago. (The new venue has significantly more capacity than the prior venue in Philadelphia.) It’s quite the agenda, with speakers including Burton Malkiel, Jason Zweig, Michelle Singletary, and many more (including the regular Bogleheads faces, such as Bill Bernstein, Rick Ferri, Allan Roth, Christine Benz, and myself).

Recommended Reading

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Calculator for Backtesting a Portfolio or Asset Allocation (Also Monte Carlo Simulations)

A reader writes in, asking:

“Is there a website or calculator that you recommend for showing the historical results of a portfolio? Something where I can enter an asset allocation and the calculator will tell me what the return would have been and how risky.”

Yes, absolutely. is an excellent tool for this sort of thing. From the homepage, select the link for “backtest asset allocation” if you want to choose from inputs such as “US large cap,” or click the link for “backtest portfolio” if you would prefer to provide the ticker symbols of specific mutual funds.

The calculator lets you adjust your modeling for various rebalancing options. For example, you can assume the portfolio is rebalanced monthly, rebalanced annually, never rebalanced, or rebalanced using “rebalancing bands” (e.g., rebalanced whenever the allocation is off-target by 10%).

And it lets you make assumptions about ongoing contributions to, or spending from, the portfolio. You can make adjustments such as whether the spending is a fixed percentage or a fixed dollar amount. (And if it’s a fixed dollar amount, should it be inflation-adjusted over time?)

After you provide all of your inputs, the calculator tells you the historical return, standard deviation, best/worst years, maximum drawdown, and other various results.

PortfolioVisualizer also has the option to run Monte Carlo simulations. (Select the link for such from the homepage.) On the Monte Carlo simulation page, you can have it use historical data, or you can select other options for the return assumptions (e.g., “parameterized returns,” which lets you input expected return and standard deviation for yourself).

The PortfolioVisualizer website also has a ton of other calculators that I’ve never even used. In short, it’s an incredible resource. And it’s free. (Though there’s also a paid version that gives you some additional capabilities, such as saving results, exporting to spreadsheets, etc.)

Of course, when backtesting, be sure to remember the limitations of relying on historical data. Just because a portfolio provided a particular return in the past doesn’t mean it will do so in the future. And the same goes for all of the other outputs (e.g., how risky an allocation would be, or whether it would have satisfied a particular spending rate in the past).

And ditto for the Monte Carlo simulations. They can be useful, but remember that we don’t actually know what the future distribution of returns will look like for any asset class. If a set of Monte Carlo simulations shows, for example, that a particular portfolio has a 92% chance of satisfying a given spending rate over a given length of time, we don’t actually know that the portfolio has a 92% chance of satisfying that spending rate over that length of time. Rather, what we know is that, given the assumptions that you used, the portfolio had a 92% chance of success.

Investing Blog Roundup: How Much Do Retirees Spend on Out-of-Pocket Health Care?

Karolos Arapakis of the Center for Retirement Research at Boston College recently released a brief (adapted from a longer paper) that addressed the question: how much do retirees pay in lifetime out-of-pocket health costs, excluding premiums and including long-term care?

The finding: a 65-year-old single person will pay, on average, about $56,250 in out-of-pocket costs over their remaining lifetime (in 2021 dollars). For a couple, that figure is $80,000. At the 90th percentile of such spending, the total is about $111,250 for single people and $163,750 for couples.

Recommended Reading

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Pension Choices: Lump Sum or Monthly Payment?

A reader writes in, asking:

“The age old question: Lump Sum or Monthly Payment? A few years ago it was considered lunacy in the office for anyone who took the Monthly vs Lump option. With increasing interest rates the Lump option today is significantly smaller than last year – and stability of guaranteed income the Monthly is looking more attractive in today’s climate. How does someone figure out – optimal choice, not just Lump vs Monthly, but, if you go Monthly understanding the financial tradeoff on choices of survivor percentage, to “X year Certain and Life Annuity” and “Cash Refund Unpaid Balance” payment options. How do you figure out what is the better option – or at least what you are trading off on one vs the other?”

For pension decisions, when looking at the decision for a client, I typically take two approaches.

First is the quick/easy approach, which is to compare via an online annuity quote provider, such as I’ll put in a given premium (e.g., $100,000), and see what is the annual percentage payout available, for a person who is the age in question (or for a couple of the applicable ages).

And then that percentage payout can be compared to the percentage that is available as the pension annuity option (i.e., annual income, divided by alternative lump sum). Sometimes what you’ll see is that, relative to what’s available in the private marketplace, the pension annuity option is a very good deal or a very bad deal, which then makes the decision relatively easy. Often though, the answer is that it’s a roughly “fair” deal.

And I’ll repeat that process for each pension option for which there is a comparable annuity option. Sometimes you’ll find that one of them is clearly the best deal, actuarially. One limitation of the above method though is that there are often a broader range of pension payout options (especially survivor options) than comparable options on annuity websites.

The second approach is to do an expected present value comparison. For a single person, that’s essentially asking what is the person’s life expectancy, and then “discounting” those expected payments (from the lifetime annuity option) to determine the present value, and see whether that is meaningfully higher or lower than the amount available from the lump sum. (This article has steps for doing a present value calculation in Excel.)

For a married couple, it’s the same general concept but a bit more involved. In that case, I use this spreadsheet (credit to #Cruncher on the Bogleheads forum) to calculate how likely each of the mortality scenarios is for each year going forward (i.e., probability both people are alive, probability only personA alive, probability only personB is alive, probability neither person is alive). And then for each year I multiply those probabilities by the benefit payment in question (i.e., payment if both people are alive, payment if only personA is alive, and payment if only personB is alive). And then I discount all of those probability-weighted cash flows back to their present value, and see how that compares to the lump sum option.

When doing an analysis similar to the above, it’s important to use varying mortality assumptions to see how sensitive the results are to such changes. And the results should be treated as a rough conclusion, because we don’t know how long you (and/or your spouse, if applicable) will live. So, for example, if two options are only a few percentage points apart in terms of expected present value, rather than concluding, “ah, this option is better,” I think a more appropriate conclusion is, “these two options are very similar.”

In addition, all of the above is purely dealing with the actuarial expected payout. And there are two other factors to consider as well: taxes and longevity risk.

With the Social Security filing decision, tax planning is usually a point in favor of waiting (because Social Security benefits are themselves tax-advantaged). But with the pension decision, it could point in either direction, or neither.

From a longevity risk point of view, the annuity option (if married, the annuity option with the highest survivor benefit) is generally the better option, though as per the above discussion it could make sense to take the lump sum and buy an annuity elsewhere. In addition, for people whose desired retirement spending is very modest relative to available resources, longevity risk is already very low. So a further reduction in that risk isn’t particularly valuable.

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Investing Blog Roundup: Inflation Reduction Act – Environmental Credits for Homeowners

The Inflation Reduction Act (signed into law last week) includes extensions, expansions, and renaming of a few environmental-related credits for homeowners. CPA Beth Nelson has a great write-up with the details:

Recommended Reading

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