Before the article, here’s what’s happening this week on our podcast, Personal Finance for Long-Term Investors:
George R.R. Martin’s epic fantasy saga, A Song of Ice and Fire, started in 1996, with Martin publishing the first three books over five years. The books built a cult following thanks to their gritty realism, deep characters, and (let’s be honest) a willingness – or even a penchant – to kill off anyone at any time.
Then HBO came calling. In 2011, the Game of Thrones adaptation turned the books into a global sensation of a TV show, just as Martin published A Dance with Dragons, the fifth book in the saga.
Since then, though, fans have been (im)patiently waiting for the sixth book, The Winds of Winter. Martin has been working on it for over a decade with no release date in sight. The audience reaction to the delay has ranged from good-natured memes to full-blown despair, especially since the TV show timeline overtook the books’ timeline and ended…controversially. To make matters worse, there is supposed to be a seventh book, A Dream of Spring.
The first five books are hugely popular and highly regarded.
But until Martin, now 76, finishes the series, it will feel imperfect.
How, why, and when should we let “perfect” interfere with “good enough?”
Social Security Lump Sum?!?!
Last April, I wrote a surprisingly popular article that suggested retirees could reframe their thinking about Social Security. Instead of a “measly income stream,” they could conceptualize it as a meaningful lump sum asset from which they take a monthly withdrawal.
Ex: it’s not just “$2500 per month.” It’s a $600,000 lump sum that’s paying you 5% interest!
Last week, reader Bill wrote to me to push back on the entire premise of this article:
“I don’t think you should consider SS as an asset as its an extraneous/unuseful calculation. Instead, determine your portfolio asset allocation by what you need from your portfolio and when it’s needed. This uses the expected amounts of guaranteed income. Retirement Planning is complex enough that minmizing the variables involved is sometimes helpful and valuing SS as a lump sum is one variable that is not needed.”
Technically speaking, Bill is 100% right.
When I go “behind the curtain” into a real financial plan, I do not treat Social Security as a lump sum. I treat it as what it is: an income stream. That income stream is part of someone’s overall cash flow analysis, along with their annual spending, irregular big-ticket spending, proposed Roth conversions, and necessary portfolio withdrawals to balance the budget.
This “Cashflow Planning” is a fundamental step in someone’s retirement plan. To then treat Social Security as a “lump sum” on someone’s balance sheet would be double-counting.
Bill and I shared a few more emails and he wrote:
Some people learn/understand differently…e.g. they don’t understand the simple math of [income minus expenses], but they get a warm and fuzzy feeling seeing a larger number [as a “lump sum”].
I want to focus on this part of Bill’s statement: “Some people learn / understand differently”
Theory of Mind
YES! YES! YES! Bill hits the nail on the head with a 10-pound hammer. BAM! I love this line, and it’s a fundamental truth that guides my writing, podcasting, and professional work.
Different people learn and understand differently.
That is “theory of mind” in a nutshell. It’s the ability to understand that other people have their own thoughts, feelings, beliefs, and perspectives that may differ from yours. Different people learn and understand differently than you.
My engineering brain knows where Bill is coming from. His thought process is: “focus on the math, the numbers, the objective facts, and then optimize.” And again, when I go “behind the curtain” to the world of pure financial planning math, that is precisely what we do.
But the vital truth is that many people don’t think like that. They don’t think like me. They might not think like you, either. Different people require different mental models to latch onto, helping them understand and make good choices. And those choices might not be perfect to you or I.
But that’s where we shouldn’t “make perfect the enemy of good enough.”
This “Social Security lump sum” article originated when I was talking to a group of teachers. One of them was expecting ~$2500 per month from Social Security and another $4000 per month from her pension. But she “only” had $100,000 saved in her retirement accounts (403b and Roth IRA).
Should a teacher in this scenario feel bad for only having $100,000? Should she be worried? Anxious? Her understanding of retirement planning made her think that she was drastically undersaved.
The problem, as I saw it, was that many people focus solely on the assets they can point to on their balance sheet, instead of also understanding the true power of their future fixed income. This teacher didn’t realize that her $6,500 per month of future fixed income is amazing!
So I asked myself: how do we help someone conceptualize their future fixed income in an apples-to-apples way to the assets on their balance sheet? The answer is simple. You pretend the fixed monthly income is a lump sum asset that provides monthly income. The only question is what “interest rate” to assume.
Imperfect
This “lump sum” approach is not perfect, or at least not perfect for all people. But I’d maintain this approach is perfect – or at least better – for a subset of people. This was a better mental model for this teacher, allowing her to conceptualize the true value and power of her fixed monthly income.
While I wish I could create the “perfect” financial plan, it’s a bit of a fool’s errand. Just think of a “simple” retirement plan and these variables:
- When will you die?
- How will investment markets perform?
- How will you spend money?
- What will your health (and the healthcare system) look like?
- How will tax regimes change?
If you can answer all those questions for the next 30 years, we could get your plan close to perfect.
Instead, we have to design a plan for flexibility. We have to agree, up front, that any decision will make today will be imperfect. We know we’ll be wrong – or at least that specific components will be proven wrong in time. That’s ok. It’s infinitely better than having no plan at all.
Game of Thrones character Cersei Lannister famously believed, “When you play the game of thrones, you win or you die. There is no middle ground.” Perfection or death. Nothing in between.
Financial planning, thankfully, has a bit more wiggle room.
Thank you for reading!
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-Jesse
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