Financial Planning AFMG

Unknown unknowns

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” – Donald Rumsfeld
I remember when Secretary Rumsfeld spoke about unknown unknowns, and how the concept was initially mocked. Funny how it is not unusual to hear people reference this concept today. As a financial planner, I have come to embrace the importance of understanding these distinctions, and how they impact any financial plan.
In a perfect world, every client would have nothing but known knowns, that is to say they know what information they need to form a financial plan, and they have that information. Actually it wouldn’t be perfect since I wouldn’t be needed!
The one category not mentioned in the Rumsfeld quote above is unknown knowns. Unknown knowns, to my thinking, is information you know but do not realize is relevant to the planning conversation. Maybe you have read articles telling you that you will spend 50%, 80% or 150% of your preretirement income during retirement. Maybe you are using one of those random percentages to determine how much you need to save. However, you know that you intend to spend your retirement traveling the globe staying at only 5 star hotels. You likely have a better idea of how much you will be spending than any of those generic retirement articles will tell you.
Known unknowns are what we know we want to know that would make our plan more certain but we will not. When will we die? Will we need long term care? At what rate will our savings grow? Will the market be selling off just when we need the money? All of these may be good to know, but are impossible to predict.
The most dangerous category to a retirement plan is the unknown unknown. Planning is much harder if you do not know what you need to plan. Learning what questions to ask is important, even if you don’t know the answers yet. Retirement surveys routinely show workers are confident they will have in having enough money in retirement, but they also show many do not know how much money they will need. One survey (Prudential 2018) found 40% of respondents who were near retirement were “not at all sure” how much income they would need in retirement. It would not be surprising if hearing that question was the first time many of that 40% had thought about required income.
The secret to a successful retirement plan is to have as many known knowns as possible and as few unknown unknowns. How does this happen? The short answer is education. How you get that education is matter of personal preference. My admittedly biased opinion is that working with a financial planner would be good route to go, but many people have been successful doing it themselves.
I suggest you ask yourself these three questions, and if you have at least one “no” then you probably should talk to a planner:
– Can I do it myself?
– Do I have the time to do it myself?
– Will I do it myself?
Generally speaking, you will end up using a combination of DIY and professional support. Regardless, figuring out the questions that need to be answered will get you closer to having a successful retirement.