The Capitalist Investor - Episode 39

There are a lot of incorrect financial plans out there. The last thing you want is to think you have the perfect retirement planned—only to find out you’ll come up short. Many companies or financial advisory firms advertise “free” or “cheap” goal-based retirement plans. The truth is, anyone can generate a goal-based plan—but why do we think that’s not good enough? How should you build an accurate financial plan? Listen to this episode of The Capitalist Investor to find out!

Outline of This Episode

  • [0:20] How to build an accurate financial plan
  • [2:57] Capital market return expectations
  • [9:05] Why a goal-based financial plan will fall short
  • [15:12] Calculating on straight-line returns
  • [20:35] How tax is calculated in planning software
  • [23:38] Why you should update your financial plan often

Capital market return expectations

If you’re working with a financial advisor to start retirement planning, one of the first questions you want to ask is: What are your capital market return expectations? Why? Every single financial planning software comes preloaded with historical rates of return—not future expected returns.

Financial planning software comes preloaded with a 9.4% return expectation for US Large-Cap stocks. That is too high. One of the worst things you can do is to expect higher returns from your retirement plan and not reach them. If you’re counting on that, you’ll be in for a rude awakening.

For example—since 1930, the S&P 500’s average annualized return was 9.5%. Over the last 40 years (1980 onward) it saw a return of 11.88%. Over the last 30 years, the S&P 500 saw a 9.96% annualized return. That all sounds good, right? But from 2000 onward the annualized return dropped to 6.28%. Your future expected returns will be lower.

We look at all of the resources available and use them to calculate a projected annual return typically around 6.5%. We estimate that 90%+ of wealth management firms do not change those pre-loaded return percentages.

Why a goal-based financial plan will fall short

If you’re calculating a financial plan yourself, chances are you aren’t planning for inflation or looking at tax consequences. One of the big issues with goal-based financial planning software is inflation. You HAVE to apply different inflation rates to different expenses—it can’t be a global rate. Why?

If your mortgage payment is $3,000 a month and you have 15 years left—that mortgage payment won’t go up. In year 16, once your mortgage is completely paid off, your monthly expenses drop $3,000. But other non-fixed costs—such as groceries—will go up by the rate of inflation (approximately 2.5% per year).

Secondly, the goal isn’t to just barely skate by. If you retire at 60, you probably want to ‘live it up’ for the next 15 years or so. Your expenses may go up. Do you want to tour Europe? Travel to visit family? Downsize your home? If you’re downsizing your home, it may cost you money. How do you want to finance that? Do you take cash from your retirement account(s)? A cash flow based plan can answer these questions. Listen to hear our debate on financing vs. paying with cash.

What the Monte Carlo Simulation can tell us

We’ve already established that you won’t likely get a 10%+ rate of return on your investments, But you will also not get the same return on your investments every year. There will be variability in the returns that you get—which goal-based plans don’t take into account.

We use the Monte Carlo Simulation to run different scenarios for how your plan will work under any and all market conditions—because real-world stuff will happen and you need to account for that. The “experts” say that a Monte Carlo score of 70% or higher is good. But a goal-based plan using straight-line returns with a 70% score is setting yourself up for failure—because the odds of you having money left when you die is closer to 50%.

We prefer to see 80% or higher. Let’s look at an example: A 65-year-old with $1 million of investable assets spends an additional $40,000 on top of their social security benefits a year. With a 5.5% rate of return with a standard deviation of 8 (what we factor in)—at the end of the plan—the median they’d have left is $519,000. What happens if we followed the goal-based plan with their projected returns? Listen to find out!

A goal-based plan: ONLY a starting point

Goal-based plans are over-simplified. They may be a good starting point, but you need to use more realistic numbers based on how the tax code really works. You need more realistic market expectation projections that are updated annually. The only way to do that is through a cash flow based financial plan. If your “free” financial plan says you only need to save $1,000 a year for life, it’s going to fail you. Free is no good if it gives you the wrong answer. Listen to the whole episode for our complete discussion around building a retirement plan the right way.

Resources & People Mentioned

Connect with Derek Gabrielsen

Connect With Mark Tepper

Send your questions and comments to us at

Subscribe to The Capitalist Investor

Show Notes by

Keep Listening to The Capitalist Investor:
Episode 10:
Coronavirus: Small Businesses Need Help, Ep #10
Episode 25:
Protests Fine, Riots Bad, Ep #25
Episode 43:
Snowflake Hype, TikTok Drama, and Tech Worries, Ep #43
Episode 59:
Rating the Best and Worst Presidents According to the Stock Market, Ep #59
Episode 75:
Sell in May and Go Away, Ep #75
Episode 91:
12 Questions Retirees Often Get Wrong About Taxes in Retirement, Ep #91
Episode 107:
2022 Predictions, Ep. #107
Episode 12:
Fiscal Stimulus Bazooka, Ep #12