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ONE OF THE MOST important ideas in personal finance comes not from a financial expert but from a 20th century English philosopher named Carveth Read. “It is better to be vaguely right,” he wrote, “than exactly wrong.”
Why is this idea important? It gets to the heart of why financial planning can be so tricky. For starters, few people—if any—can claim to be perfectly rational when it comes to money decisions. But more to the point, even if we wanted to be perfectly rational, the reality is that it wouldn’t be possible.
Why not? As financial planner Ashby Daniels has written, “All data is, by definition, about the past, but all decisions are, by definition, about the future.” In other words, in the absence of a crystal ball, there’s no such thing as being truly rational when making financial decisions.
That’s why Read’s prescription is so valuable: Instead of trying to be precisely right—an impossible goal—we should instead aim to be roughly right. What does that mean in practice? Here are nine ways to apply Read’s recommendation:
1. How to ensure you have enough. If you’re in your working years, you may be wondering how much to save for retirement. Alternatively, if you’re retired, you might wonder how much you can safely spend each year. To answer these questions, you could build a spreadsheet.
But any spreadsheet will be lacking. There are just too many variables. First, and most obvious, our spending goals might change. Other unknowns are inflation, taxes and market returns. The solution? I suggest starting with a spreadsheet, but not just one. Explore multiple scenarios. You can’t address every eventuality. But if you conduct a handful of stress tests, it’ll allow you to identify a range of reasonable answers—and to be roughly right.
2. How much to save in 529 accounts. These accounts are a special case because the money can typically only be used—without penalty—for education, though the new tax law offers an intriguing exception. Because of that limitation, the key challenge is to avoid saving either too much or too little. How can you be roughly right? Instead of frontloading the account, I recommend making regular annual contributions. That’ll allow you to assess the account’s growth each year.
It’ll also allow you to gain a better sense of your children’s education needs. Do you see them headed to a state university, or do you see them going to a private college and maybe graduate school? There’s a wide gap between those two ends of the spectrum and, when children are young, it’s difficult to know where they’ll end up. Spread your contributions out over time, and it’ll be easier to be roughly right.
3. When to stop contributing to tax-deferred accounts. Conventional wisdom says folks in their working years should take every opportunity to defer income into their 401(k). But there comes a point for some people when they’ve accumulated too much in tax-deferred accounts. How could this be possible? Required minimum distributions from tax-deferred accounts can push up the income of some investors to surprisingly high levels in their later years, resulting in steep tax rates.
Business owners and professionals with access to multiple tax-deferred accounts can find themselves in this situation. I’ve seen folks in their 80s stuck in the top tax bracket. Because of that, it can make sense at a certain juncture to shift future savings away from traditional tax-deferred accounts. When? Again, I’d start with a spreadsheet. But if the numbers could go either way, one solution would be to split your contributions evenly between traditional and Roth retirement accounts. As I’ve noted before, there’s nothing wrong with a split-the-difference solution when there’s no clear answer.
4. How much cash to hold. This is a source of concern for many. On the one hand, no one wants to risk a cash crunch. On the other, no one likes to see assets lying fallow. What to do? Total up all of the possible things that might go wrong—a new roof and a new car at the same time, for example. Since there’s no reason to think multiple bad-luck events would all occur at the same time, this number would represent the absolute maximum you might hold in cash. You can always adjust down from there. But with this number as a guide, you’ll have a better chance of being roughly right.
5. How to design a portfolio. In personal finance, people debate endlessly about how to structure portfolios. Should you include international stocks and, if so, how much? On the bond side, does it make sense to buy corporate or even high-yield bonds? It’s impossible to know in advance which portfolio will be best. Fortunately, there’s good quantitative research on this from Vanguard Group and others, offering asset allocation ranges that can help you to be roughly right.
6. How much to help adult children. Warren Buffett has famously said that his goal was to give his children enough so they could do anything, but not so much that they could do nothing. Even if you don’t have Warren Buffett’s wealth, you might struggle with this question. One sensible approach is to make incremental annual gifts to your children. Smaller gifts are better than one large inheritance for two reasons. First, incremental gifts give you the opportunity to see your children enjoy the gifts. Second, it gives you the opportunity to see how they manage smaller amounts before giving them more.
7. Whether to employ dollar-cost averaging. Historically, the U.S. stock market has risen in roughly three out of four calendar years. That means that, statistically, dollar-cost averaging is illogical. But the alternative—lump-sum investing—has a problem of its own: If the market drops sharply after investing a big lump sum, investors may feel substantial regret. To square this circle, don’t view it as an either-or decision. If you have some money to put in the financial markets, you might invest half right away and then dollar-cost average with the rest. A formula like this could help you to be roughly right.
8. How to reduce a concentrated holding. If you work for a public company, its stock may account for an uncomfortably large portion of your portfolio. But reducing it might entail an outsized tax burden. How can you be roughly right? One way is to set a target for reducing the shares to a specific percentage of your portfolio, such as 10%. Then sell enough shares each month—regardless of where the stock price is—to reach that target over three or five years. Over that period, you’ll capture some good prices and some not-so-good prices, but overall you’ll be roughly right.
9. How to allocate a windfall. Everyone’s heard about professional athletes who’ve earned millions, only to end up in bankruptcy. The fact is, windfalls are tricky even if you aren’t a professional athlete. I suggest developing a framework. You might save 50%, set aside 30% for taxes and give 10% to charity. Of course, that’s only 90%. For the remaining 10%, intentionally do something you wouldn’t ordinarily do. It’s okay to head to the Mercedes dealership or the jewelry store—provided you’re only splurging with a fixed percentage of the money.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.
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Thank you for another nice piece, Adam. I think the “roughly right” mindset is very important to have a peaceful financial life, otherwise people could live with too much regret or the “not/never enough life”.
4.cash
if u r a widowed orphan w/o kids, feel free to get out of the market
so your emotions are not ruled by a ‘long con ponzi’, and have so much
cash and ss, the world’s financials are not a concern and inflation is just a word, and not a worry. there are more of us out here than u will ever know…
Thanks for a great column.
Out here in California, lots of people in my area are dealing with needing a new roof *and* a new car this week. Which has me re-thinking my emergency cash plan.
Being well-insured and having an emergency fund helps, and yet there’s something more most of us need.
I’m adding a number 10 for myself to your excellent 9, something on making sure I spend enough on myself and others to maintain friendly relationships with neighbors and old friends, and also making new friends. These are small amounts, mostly, from buying cookies and raffle tickets to joining neighborhood associations and sharing backyard bounty. Joining a gym to stay healthy and also meet people is part of this too.
While a pile of cash is helpful, when the power is out are you going to be headed to stay with friends/family, or are you off to the Red Cross shelter? Not to minimize the necessity of emergency shelters. But if possible I’d prefer to be at home and know a neighbor will drop by with a hot meal.
Of course friendships are not merely transactional and there are many small ways neighbors can be “neighborly.” I’m sure you all have favorite ways and habits you’ve contributed to the well being of others, and so other people are also there for you if and when you need that. Include that on your balance sheets.
a pile of cash means u have a whole house generator and u r bringing
the hot meal to the neighbor.
This is such a good article because, for someone like me, it contains concrete examples.
These 9 examples aren’t roughly right…they are right. There is no way to get them exactly right.
If you think the Future will mimic the past, creating a plan with basic financial axioms like 100minus age in stocks, and using index funds( 3 fund portfolio is all one needs), Investing for the long term is 2nd grade stuff. And of course, “STAY THE COURSE” and yes, listen to the words of Bogle and Malkiel. A great chance the next 50yrs will mimic the past 50. Indexing has proven itself. No one can refute its superiority
If there is about 3% change I/we be alive past age 80 and blessed to have 500K in RMDs — we consider that’s a double-blessings. Paying tax on such large RMDs — is least of our worries. We would love to have more of that HUGE $RMD pain 🙂
Tax diversification is nice., understand “unspent” ROTHs are possibly best suited for heirs (in higher tax brackets). HSAs are great too. Post Secure ACT 2.0 — now we have more years to Roth-convert and/or QCD some of the Trad-IRA monies before RMDs kick-in at future/lager age of 75 (for most folks, do check your applicable RMD year/date if born about 1959) ..
When you combine – QCDs, consider/donating to charity as beneficiary on Trad-IRAs, large medical costs/needs (over 7% AGI), or LTC care costs such as SNF/CCRC/Memory-care etc .. can nearly covered tax-free (over 7% AGI) from Trad-IRAs. Also large Trad-IRAs allow possibility of FIRE, it could handle/mitigate Sequence of Returns better, premature death, or disability or death too !!
Bless us with large Trad-IRAs — we will happily figure ways to make-use of those (even if needing to pay large RMD taxes in some years)
Regarding #3
I’m sure we have “too much” in our retirement accounts, but I’m still not convinced that we should stop contributing to them. We have 2-3 years to retirement, and our income is high. If we paid taxes on that income now, it would be in a very high bracket. Yes, our RMDs might be uncomfortably large in the future (a future that just moved to age 75), but our income will still not be where it is now.
And #4:
We have more cash in savings than we need for emergencies, and we’re adding to it. There are two possible things we might do with it. First, we may buy an investment home for our daughter to live in (she’d pay us rent and manage roommates). That cash is easily accessible for a down payment without having to liquidate assets in our retirement accounts at a moment when the stock market is down. If we don’t do that, the cash will be in our “cash bucket” when we retire in several years, a buffer between retiring and drawing Social Security (since we’re going to wait until 70 for that). We’re earning 3.3% at the moment in two online savings accounts.
Why not just shift new contributing into a brokerage account that will give you more flexibility or contribute only to Roth at this point? Or perhaps municipal bond funds that will give tax free income in the future?
Just curious, given your quite enviable financial picture, why wait to 70 to start SS? It doesn’t appear the extra monthly income will be needed. Why not grab it at FRA and invest it?
I’m not confident I can do better investing than the return of the only inflation protected annuity, which pays an extra 8% each year you wait.
Because you never know…
I’d wait too.
Because you never know is why I wouldn’t and didn’t wait.
“I’ve seen folks in their 80s stuck in the top tax bracket.”
That means that your income in your 80s is well over $500K. Is that so bad? Give me the income, I’ll pay the tax!
That’s the point of asset allocation and the beauty of investing exclusively in mutual funds: one has to be only vaguely right.
I’m a huge fan of this strategy. Striving for roughly right has helped move me forward when analysis paralysis would’ve kept me stuck in place, missing opportunities. It’s also helped avoid expensive mistakes. This is a really timely reminder as I work through my post-RIF baseline plan, thanks Adam!
Same here. I have to eventually realize that I’ll never have all the details I want to have before I make a decision.