Investors, unsure about whether they are on track to meet their financial goals, frequently ask me to perform a financial “checkup.” I suspect that is the result of three influences: They are concerned about their ability to maintain their desired lifestyle for as long as they are alive; they have seen financial checkups relentlessly offered by various purveyors of financial services and products; and they lack the time or specialized knowledge to determine the answers for themselves.
Although many people are willing to pay a handsome price for this service, I rarely comply since I don’t believe the one-time financial checkup is really worth very much.
Your financial health is not that different from your personal health. When you are young and in good health, you might go years without a full physical exam, a comprehensive checkup. You tend to take your good health for granted and don’t lose sleep thinking about what could go wrong. You only worry when something does go wrong.
As you age, the likelihood of something going seriously wrong increases. If you want to maximize the probability of staying healthy and living a longer life, you realize that checkups need to come more often — at least once per year. Why? Because it is important to catch the onset of a problem early when it can be cured or managed with the greatest effect and least risk. Skipping those checkups for two or three years could mean missing a problem until it’s too late to fix, or too late to fix without considerable sacrifice.
Your financial health works the same way. When you’re young and a long way from retiring, you can afford to make mistakes. Given 20 or 30 years, you can solve most any financial problem. You save and invest without a clear picture of your goals, so when you reach the end of your career, unless you’ve made some horrendous mistakes, you probably won’t know what your lack of attention has cost your financial health. Even at this stage, however, getting a checkup at least once a year is smart but less important than it will become later.
As you get older and closer to retirement, the effect of making financial mistakes grows. Once you retire, your bed, as they say, has been made and you’re working from a pool of limited resources. Now, if you want to squeeze the maximum standard of living from what you’ve got, you’ll have to avoid mistakes and catch problems early to minimize their impact. With the rate of change in today’s world, yearly checkups are not enough. You need to monitor the status of your financial life more frequently. When balancing the costs and the benefits of monitoring, I find that a six-month checkup schedule is optimal.
Like a physical exam, a financial checkup can only tell you where you stand at that moment in light of certain assumptions about how you’ll proceed in the future. Your long-term financial health, or success, is a function of two factors: where you are today and what happens in the future. The road through retirement is littered with the bodies of hardworking people who had enough to retire comfortably but made mistakes that squandered that opportunity.
For me, or anyone, to tell you that you’re “OK” financially, assumes that you’ll manage your finances a certain way in the future. How can I possibly tell you that you have the resources you need to retire if I have no idea how you’ll make the myriad decisions you’ll have to make along the way?
One-time financial checkups are a selling tool — a “come-on” to get your attention and some other, more profitable, business from you. Don’t fall for it. Stop looking for financial advice and start looking for accountability.
If you ask me to take responsibility for your financial health — for ensuring that your financial goals are met — I’ll start giving you advice, instructions for achieving that end. And the first piece of advice I’ll give you is that you should submit to a checkup at least once per year if you’re under 40 years old, and at least twice per year if you’re older. That’s the only way that I can ensure your continuing financial health and take responsibility for the quality of my advice.