# The Basic Limitations of Financial Planning and Forecasting

The numbers don’t lie, or so the saying goes. While this is the simplest turn of phrase, it’s not exactly the whole truth. It’s not necessarily the numbers that are the issue, but the interpretation and application of the numbers. This just so happens to be one of the primary limitations of financial planning and forecasting, in general.

## Financial Planning Issues to Consider

The thing about the typical financial planning industry is that projections and math are used to show people idealistic scenarios without all the proper contexts. For example, a 401k or investment projection can look very promising. However, these projections are often created with a custom rate of return, making projections more or less fictitious.

Not to mention 401k projections rarely cover taxes in any meaningful way. So people who choose to lock their money away in 401k accounts have inaccurate expectations about how much money they’re going to have, and how much they will need.  In fact, the father of the 401k, Ted Benna, has his own regrets about the role the 401k plays in today's retirement.

### The Right Numbers Tell the Right Story

For example, the below projection of a 401k paints a pleasant picture. Based on about \$500,000 of contribution over the years, one can make almost \$1.5 million. This is often as far as a projection will go.

However, what happens when you add management fees and taxes on the distribution? Many projections don’t share this information. Below, however, you’ll see that simply adding a management fee of 1.5% reduces the account by more than \$700,000.

Adding a future tax rate only further cuts into the pie. While the Gross value of the account remains the same, the Net value is now only \$1.1 million. While this is still a significant sum, it renders the Net earnings to be less than what they contributed over the 35 years. Additionally, the taxes are higher than the Net contributions. And while the “projected” ROR is 7%, the actual ROR is more like 4.43%. What happens if the actual performance is much less than projected… how low will that push the actual return?

## The Grey Area of Financial Math – The Limitations of Financial Planning and Forecasting Without the Right Numbers

The problem with financial math is that you have to have the RIGHT numbers to get the truth. You can plug things into a calculator all day, yet if it doesn’t have all the right information, you’re not getting the full picture.

In a roundabout way, this means that the numbers can lie if you’re not telling the correct story. The Truth Concepts calculators are made to be versatile, which means that you can use them for several purposes and illustrations. Not every field needs to be filled out to tell every story or get every calculation. This is why it’s critical to know what you’re trying to accomplish.

For example, if you’re doing a mortgage demonstration for a client, it’s critical that you compare a 15-year and 30-year loan over the same 30-year time frame. While we have written more extensively about choosing the right mortgage, suffice it to say, if you don’t use equal time frames for the demonstration, you aren’t telling the whole story.

## Financial Planning Problems and Solutions

In order to combat financial planning problems and create solutions, it’s important that we can go above and beyond to show the missing information in projections. Not just that, but advisors should be able to speak confidently about these topics without the numbers because they know the numbers will back them up.

Rebuilding the integrity of the industry is how we combat the typical financial planning problems. That integrity comes from putting in the work and making the calculations second nature. That way, the “grey area” of financial math doesn’t pose a problem, because it will be crystal clear which projections account for every variable.

Joining Truth Concepts 360 can help you to hone your calculator skills. The membership includes our online training portal, live monthly training calls, and a free annual ticket to a Truth Training event. You can become a member today. If you have any questions, please email them to su*****@tr***********.com.