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BEFORE HE DIED LAST year at age 99, a friend asked Charlie Munger if he planned to leave his considerable wealth to his children. Wouldn’t it impact their work ethic, his friend asked?
“Of course, it will,” Munger replied. “But you still have to do it.”
“Why?” his friend asked.
“Because if you don’t give them the money, they’ll hate you.”
Few of us are billionaires. Still, I find Munger’s comment instructive. It illustrates a reality about personal finance: that the notion of a perfectly optimal answer to any financial question is just that—a notion. Similarly, relying solely on a calculator to make financial decisions rarely results in the best answer.
That’s the case, I believe, for three reasons. First, there’s the reason that Munger cited: that emotions can’t be overlooked. No matter how mathematically optimal a decision might be, if we can’t live with that decision—or our family can’t—then, by definition, it isn’t really optimal.
Second, even when a question looks like it has an entirely quantitative answer, it’s rarely that simple. That’s because one or more of the variables—and sometimes all of them—change over time. Among other things, markets evolve and tax rules change, so the inputs to a financial decision at any given time will always involve some estimates, guesses or predictions. In many cases, in other words, it’s difficult to even define “optimal.”
A final reason it’s so difficult to make optimal decisions: Over time, our goals can—and often do—change. To a degree, financial planning means we’re always contending with a moving target.
For all three reasons, financial decision-making requires a balance. On the one hand, we can’t ignore the numbers. On the other, we shouldn’t feel too tightly bound by what the calculator says. Below are other situations where you might opt for a solution that—strictly according to the numbers—might seem suboptimal.
Holding cash. In 2011, an Illinois man named Wayne Sabaj was in his yard picking broccoli, when he found an old nylon bag buried in the dirt. Inside was $150,000 in cash. Banks today are protected by FDIC insurance, so this isn’t how most people store their savings. But it’s a reminder that it isn’t unreasonable to hold some amount of cash in your home.
This cash won’t earn interest and, through that lens, it might seem suboptimal. But I still recommend it. Why? In recent years, we’ve seen an uptick in cyberattacks, and many of these are aimed at banks and brokers. If your funds were temporarily inaccessible, it could prove helpful and might provide peace of mind to have a few dollars on hand—though preferably in a safe rather than in the yard.
Building a portfolio. One of my favorite books carries the title In Pursuit of the Perfect Portfolio. It profiles 10 prominent figures in finance and describes how each of their philosophies would translate into an investment portfolio. The irony of the book’s title is that, in the end, there is no single perfect portfolio. A “perfect” portfolio is in the eye of the beholder, and depends almost entirely on each individual’s mindset and personal circumstances.
Managing taxes. You may be familiar with Roth conversions. Whether or not to do a conversion often hinges on a straightforward calculation: How would the tax rate on a conversion compare to the investor’s tax rate in future years? That’s the way to make the most seemingly optimal decision.
But there are reasons you might make a decision that defies this math. For instance, if you have substantial assets, your accounts might grow faster than expected, causing your future required minimum distributions, and thus your future tax rate, to be higher than expected. Another possibility: Because of the federal government’s debt burden, Congress might raise tax rates down the road.
Maintaining simplicity. If you have significant assets, you might consider steps to limit future estate-tax exposure since the federal rate quickly climbs to 40%, with many states levying estate or inheritance taxes on top of that. But despite that, some families forgo any estate-tax planning.
Why? A key reason is that these strategies require cumbersome and costly financial acrobatics. These families know they’ll end up paying more in tax. But for them, the optimal path is the one that makes their lives simpler, even if it doesn’t look optimal on paper.
Loosening the reins. In the 1999 film The Bachelor, lead character Jimmie Shannon learns that he stands to receive a hefty inheritance, but there’s a condition: He must be married by his 30th birthday. The problem for Shannon is that his birthday is the next day. This sets off a scramble, with Shannon scouring the city for a suitable match. This, of course, is comedy, but it gets at one of the key challenges in estate planning: that it’s awfully hard to conceive of every future scenario.
Some wealthy parents try to write contingencies into their estate plan for everything from divorce to overspending to substance abuse. These are all serious concerns, but they can be complicated to capture in a set of documents because every circumstance is different. For that reason, many people opt to keep their estate plan relatively simple, even if that means they won’t cover every possible scenario. Similar to Charlie Munger’s view, a plan which is good enough may ultimately be the one that’s optimal.
Taking the long view. If you’re fortunate enough to have a traditional pension and are approaching retirement, your employer will likely offer a choice: You can accept the benefit as a single lump sum or you can opt for monthly payments, which would be guaranteed for life. The math in these cases often points in the direction of the lump sum.
But in considering a choice like this, it’s also important to take a step back from the numbers. Take the case of Irene Triplett. When she died in 2020, she was still receiving a pension benefit based on her father’s Civil War military service. It’s doubtful that her father would have predicted this back in 1865.
Grigori Perelman is arguably the most talented mathematician living today. In 2006, he was offered the Fields Medal but rejected it. Similarly, in 2010, he was offered the Clay Millennium prize but turned it down. In Perelman’s words, “I’m not interested in money or fame and don’t want to be on display like an animal in a zoo.” That’s why he also refused the $1 million award that came with the Clay prize.
Decisions like this, in my view, may be a bit too suboptimal. But in nearly every other situation, it’s important to avoid feeling too tightly bound by the numbers when making decisions.
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 X @AdamMGrossman and check out his earlier articles.
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Bill Bernstein often says that finance is half math and half Shakespeare. Kind of captures Adam’s thoughts.
Cash: I like to have a little on hand. Maybe its because I live some distance from an ATM, and I’m not in the habit of using them anyway. I occasionally have a reason–a private-party purchase or a charitable need–that requires ready cash. Or maybe it’s genetic. My grandfather kept cash in several glass jars buried in the yard. When he died, there was a mad scramble to see if he had forgotten any of his caches before he got sick.
Portfolio: I used to fret about this one, stemming from too much reading about that “perfect” formula. I’m now aiming for simplicity.
Roth: A Roth option at work has favored boosting my ratio of tradition to Roth money. Our family has a number of reasons for getting the taxes out of the way.
Estate planning: Our attorney guided us toward a simpler plan than the one I had in mind. If you can’t trust your family… Not true for every case.
Great story about Perelman. I might accept a little bit of exhibition for a million dollars. At least, I’d like the choice!