A great adviser will spend time getting to know you before they give advice or make recommendations. During this process, they are trained to ask three important questions: 1. What is your investment objective? 2. What is your risk tolerance? and 3. What is your time frame?
An experienced adviser will often ask these in the course of conversation, and in more than one way, because their experience has shown that some clients aren’t great at self-assessing. Also, getting clarity on these important points will lead to better recommendations. To establish an effective investment plan, this information will be needed, along with other contextual data points, such as specific goals, tax status, liquidity needs, etc .
The third question – time frame – can be particularly challenging, because clients can have vastly different time frames for each of their goals. For example, funds earmarked to pay for college education for children or grandchildren could be needed decades before their retirement funds still need to provide funding for their lifestyle needs.
Why Is Time Frame So Important?
Financial planning is at its core a complex math problem that involves making some assumptions based on the law of large numbers, which states that the probability of a more predictable outcome increases as the sample size increases. Modern planning taps into the extensive statistical data about historical market return patterns over full market cycles (usually about three to five years) as well as life expectancy at different ages based on actuary tables. The planner uses this data along with your stated time frame to inform your decisions and help improve the likelihood that you won’t run out of money before reaching your goal.
For example, statistically speaking, a planner who uses average life expectancy for retirement planning could expect half of their clients to outlive their money – not good! A common way to mitigate this shortcoming would be to use the 80th percentile of life expectancy, providing a much greater likelihood that clients won’t run out of income before they run out of breath.
How Your Time Frame Ties into Generational Wealth
For families of greater wealth, running out of money is usually much less of a concern. This could allow them to lengthen their time horizon beyond the expiration date of the current generation if they can adjust their thinking to be more visionary.
Passing wealth through generations of families seems like it should be easy, but reality frequently proves otherwise. Working with a multi-generational advisory team can help succeeding generations in your family connect with someone closer to their age who is more likely to relate to the way they think and communicate. This often feels more natural …….