From Numbers to Meaning When Building Your Retirement Plan with Carl Richards (EP.226)

0:21Welcome back to The Long-Term Investor. Today, we have author and illustrator Carl Richards joining us to discuss his new book, Your Money, and the real conversations that we should be having about our finances. Now, I have 25 copies of Carl's book with me right now. And what I'm going to do is if you leave a review on your podcast app and send me a screenshot of that review to newsletter at peterlazaroff.com, or you can just hit reply on any of the newsletters that you've received from me, send me that screenshot, I will send you a copy of Carl's book. This will apply to the first 25 people who respond, so go ahead, get in there, rate and review, whether it's this episode, a past episode, or just the podcast in general.

1:05But now, let's get into my conversation with Carl Richards.

1:13Welcome to The Long-Term Investor. Today, I'm joined by Carl Richards, author of the new book, your money. You may know him from The Behavior Gap. Carl's known for all his sketches. He's known as episode 100 of this podcast. But Carl, thanks so much for coming back and sharing more of your wisdom. Yeah, Peter, super excited to have this conversation. You know, right away in the new book, you call it a conversation grenade. And I guess maybe an interesting place for us to start is what conversations do you think that we're avoiding that really require us to be throwing a grenade into the situation.

1:50Yeah. Yeah. And I should clarify, like my hope is with this book and the sketches have always operated this way, you know, you sort of toss them in a room and conversations break out. But to your question, what kind of conversations are we avoiding? Well, most of us humans avoid any conversation about money in our industry and people that are familiar with, like adjacent to the industry. Maybe we talk about investing. We might talk about the budgeting app that is better than the other one. Or maybe we'll talk about our credit card that gets the best points, you know, our reward system, all that tactical stuff.

2:28We're sort of like, that's what it means to talk about money. And then we're surprised when we open the American Express bill and suddenly find ourselves in a fight. Oh, as we call them around here, a heated discussion with a spouse or partner, or when a child says something like, we're the richest family I know, you're suddenly feeling some weird feeling. It turns out those are the types of conversations I want to be having. Like money doesn't equal math, it equals feelings. And we need to get better at understanding that. When did you realize that, that math beats feelings in real life? Is there any sort of like aha moment where the math answer blew up or where does that come from?

3:11Yeah, I think it's like the earliest work. So my earliest work was really focused around investment behavior and this gap between how an investment does and how investors in the very same investment do, right? Because they're adding, changing, chasing hot dot. And early on, we sort of called that the behavior gap. and my first attempt to solve that behavior with my own clients and with myself was to spray people with facts and figures. You know, I just thought, oh, people just must not know that by this well-intentioned behavior of trying to find the best investment was leading to suboptimal results.

3:50In other words, below average returns. And I was like, oh, people just must not know. You know, all we have to do is show them the 10 best days chart. Or give them the Ibbotson's mountain graph and say, see, don't you understand? And as that predictably did not work, I got deeper and deeper into the idea of like, there's a problem at the very core of this. And that's just how we even relate to money. So it was early on that I probably would have said it early on that your investment process only matters to the degree that it influences your behavior. And then it moved from behavior a little bit deeper and all the way down to this base level of like two plus two always equals four.

4:29Two plus two never equals envy. How come I touch money and I'm suddenly feeling weird things like pride, envy, fear, greed? So that's where it started. Well, I love hearing the background. I remember first being exposed to your work. And there's so many of these elegantly simple ideas, these aha moments that we really know once they're put in front of us, but probably forget a lot. And I think one of the things that's really special about your sketches and your work, it's not just the sketches. It's the very intentional choice of language and words that I think can allow different people to see the real point.

5:09Whereas normally, two different people might see the same dollar signs, might see the same numbers on a screen, same sentence, and have totally different meanings to those things. So I guess when you try to simplify something down to its core first principle, whether it's about money or anything, honestly, I mean, what does that process look like? That's so kind of you because that's something I work really, really hard at. And I don't think very many people understand how much effort. There are sketches where I've been thinking about one word for more than a decade. Like in one word, it's been like, ah, it's not quite right.

5:49It's not quite right. And I often get it wrong, by the way, like whenever you take something complex and make it try to try to get to the point, get to the heart of the matter and get to the simplicity on the other side of the complexity. By definition, you have to distill and edit and curate. And sometimes those editorial decisions that you make, you get wrong, like you leave out some nuance that was turns out was really important. And often I learn that pretty quickly through feedback, which is always like super helpful. But that's the goal is to get into a problem. Understand it really like I think of it as it's one of the sketches in the book, actually.

6:31I think of it as like if you think of just a line coming from the left hand side of a piece of paper and it seems really simple. We could apply this to financial decisions, too, right? Like what credit card should I get? That's like such a so that's a little bit easier. But the moment you dive into it, you get in this ball of yarn of like, and I think of that ball of yarn as complexity, but largely it's nuance and edge cases, boundary conditions. You're like out here in the weeds thinking about this. And then at a certain point, you have to decide what of that actually matters. Like, OK, well, after all of that, I think a 2 % cash back is great because I don't have to deal with reward systems and points I have to spend.

7:10But that simple answer represented a whole bunch of work. And so that's the process of like, I'll do funny things like I'll pull complete sentences. Like this book, every single word. Now, there are some things I would change after reading it for the Audible book. I noticed some things like, but it doesn't diminish that I'm like proud of every word. But I, because in every essay, I pulled whole sentences and put them back, took out a paragraph. And the question I was asking was, do I lose anything if I remove this? Sort of hunting for what was the little prince said in the book, The Little Prince?

7:50Perfection is not achieved when there's nothing left to add, but when there's nothing left to take away. So my attempt was to make this book as short as possible, but no shorter. And that's a challenge, right? When you do a really great job and there are a hundred sketches, 101. And what's really funny is, is you were referencing a sketch in your answer just now. I immediately knew what you were talking about before you even finished it. And I think that speaks to how memorable things are. I do have specific topic questions I want to touch on, but you had mentioned kind of like obsessing over one word for a decade.

8:27So first of all, is there a word in particular you have in mind that you want to share? Or is there something that you're wrestling with now that you haven't been able to quite distill down to that most simple, elegant point? Yeah, so there's two that I've been thinking about for a long time. But let me give you an example of one that has been honestly on my mind for at least a decade. And it's a Venn diagram. And by the way, if anybody listening is part of the Venn diagram police, I've already gotten all your emails. I didn't realize when I first started writing the column for the times, I would get these two page emails about why something wasn't a Venn diagram.

9:06And I'm like, I used to debate it. And then I realized I just would reply and say, you're right. I call them a circle sketch. So in one circle, it says your use of capital. And the other circle says what you say is important to you. That's how I first drew it. Your use of capital, what you say is important to you. And the overlap I had labeled like real financial planning. So aligning your use of capital with what you say is important to you. And what you say was really bothering me. I have found, and there's some academic work around this, that there's a big difference between stated preferences and revealed preferences.

9:47So I was really fond of this other saying that the check checkbook and the calendar never lie. And I would often say like, I care deeply what you tell me is important to you, but I care more about what I'll learn if I look at your checkbook and your calendar, like how you use your time and your money will tell me what's currently important to you. So that word say was like in conflict with other things like say is a stated preference. If I see your checkbook and your calendar, that's a revealed preference. So I changed it to what's important to you. Not so your use of capital aligned with what's important to you.

10:26And again, what's implied there, and this is like, again, I thought of literally for a decade, I could talk for weeks about where this is coming from. But what's implied there is there's a bunch of work to even figure out what's actually important to you and that that will change. And those revealed preferences change over time. I'm not particularly proud of some of my revealed preferences versus what I would state. Like I say time with my family, mainly outside is the most important thing to me. And then I can show you my screen time from three weeks ago on a day when I said I didn't have time to go on a hike and there was an hour on ESPN on my screen time.

11:00Well, my stated preference was I go on a hike with my daughter whenever she asked. My revealed preference was apparently ESPN was more important that day. Well, man, that's a whole bunch of work in one word. Right. What's important to you? I love that. And I appreciate kind of the behind the scenes look at how you think through these things. And again, as I mentioned, I can tell how intentional the word choice is to come up with these big ideas. And I also like the example that you're giving. Show me your credit card statement and your spending or whatever. And I'm going to show you what money goals and values are most important.

11:36You know, what strikes me as interesting, Carl, is when I sit in on client meetings and we're going over financial plan, I think people imagine that there's going to be this big buttoned up book that's delivered and the financial plan is complete. But yet every single time you look at a plan, whether it's a day later or a month later, it's wrong. And so what do you feel like in terms of cadence on check-in? I mean, whether it's on something as simple as a one-page financial plan, which you've talked about in the past, or something more complex that has numbers and spreadsheets, What sort of check-ins do you think both prevents the tinkering that's harmful, but then keeps us adaptable and adjusting our values?

12:18Yeah, it's the most frustrating answer ever. It depends, right? But you're pointing to something really important. And this idea of financial planning is really an investment planning. Any sort of planning is really a process of being less wrong tomorrow, not a process of being precisely correct today. So no matter how much time you spend with the spreadsheet and calculator, which are very important, by the way, we want to get all of our assumptions right. We want to be the best guessers in the world. We want to use the best tools in the world. We want to draw the most amazing line that represents the next three weeks, the next three years, the next 30 years, whatever it is.

12:57We want to feel really good about that. And then we have to hold two competing truths in our minds at the same time. Like we want to make the best line possible. It matters a lot. And we know what's wrong. and both of those can be true. Well, the only way to navigate an environment where uncertainty, like what's called a complex adaptive environment is to get really clear about where you are today and then have an idea of the direction you want to go. That's that plan. And then solve for the next local optimum is what the literature says. So solve for the next step, take the next step. And then you repeat that process.

13:33When you take the next step, new information will show up and you can incorporate that new information. And in a large way, when you take that next step, you'll learn how you were wrong. So it's a very fundamental shift in posture because it's not about protecting yourself and confirmation biasing your way and holding onto an outdated map. It's about actively looking for disconfirming evidence. And so to answer your question, we wanna have this big line that we've drawn called the financial plan because it gives us a sense of direction, right? These goals out in the future do three things. They give us a sense of direction.

14:11They provide gravitational pull. We've all had that. Like you write down a set of goals, you lose them. 10 years later, you find the piece of paper and you did them all like magic. And then the third thing they do is give us hope, which I really love. But this sense of direction is back to your question, which is how often do I stick my head up and make sure I'm directionally correct? and then how often am I in the present moment of take action, incorporate new information, take action. And I think that's largely driven, that throughput of that cycle, stick my head up, take action, is largely driven by the volatility of the situation, right?

14:49So you could imagine a client scenario where they have a pension and social security, the house is paid off, It's got a picket fence around it. You're looking at that maybe once a year. And you can imagine another scenario with somebody who's got a small business that is having trouble. And you might be like, hey, you call the bank, call me back in an hour, right? And you're looking up at the directional heading. You're making micro actions. So I think that the throughput of that cycle of looking, acting, being present is driven by the volatility of the situation. And that triggers a thought in me because that's going to change.

15:28And something I think, although I'd have to really double check, I think you and I spoke about last time that you were on the show. It was kind of this end of history illusion or basically that you think like you're going to stop changing yourself. So I'm 40 years old, and the things that I thought would be true about myself when I was 30 years old, like what I thought would be true about myself today or even when I was 20 looking out to 40, are very different. And I used to think I would want to work until I'm 70, and I don't know if that's true anymore. Or I would think that I want to spend my time this way or save my money this way.

16:04And one of the things, Carl, that I find so interesting about retirees specifically is how much their viewpoint on their future self changes from the day they retire in terms of having this purpose, this feeling of security from the day they retire to as they continue to age in their life changes. Kind of looking at some of the big, it's really hard. I often try to characterize the visuals you have, but they're just so power visually. You talk about future self. You talk about the security is a feeling. How do you get people to really capture these ideas and live them in their choices as they're going through a planning process?

16:44I think that as an industry, speaking really broadly, and even as a profession among the kind of people that you and I hang out with, I mean, financial planners who do the work, like real financial planners, we still have a tendency. certainly as an industry, we have a huge tendency, even as this little profession, we still have a tendency to have a false sense of precision about this process. Like I want to know the end from the beginning. I personally want to, and I know that I can't, and I still want it. And I find myself sometimes desperately grasping for ground beneath my feet. You know, like, could I just find somebody who would tell me what's going to happen with Tara, you know, like whatever it is, both personal, global, economic issues, political issues, but also like personally, like where am I going to live?

17:39And I think one thing that we could do a better job and it becomes really apparent with somebody in threshold times, you know, like whether that's retirement or changing of a job or a marriage or a divorce or any threshold moment, it becomes really apparent it because you're like, I mean, all you have to do is go back to January of 2020 and look at your calendar, even for April to realize like this. So those are one of these moments where we get a chance to see the reality of the situation. And so what I'm trying to do, and I don't know if it's useful for anybody else, is just to realize that that tension, the tension of like, oh, I'm retired.

18:20It's time to just kind of shut it down for the next 20 years. the tension of what am I going to be when I grow up, the tension of who am I, we want to resolve it. And I think the more honest path, to be honest, is it's not going to ever be resolved. Like who I am, what's important to me. Lao Tzu has this great saying, be who you really are and go the whole way. And David White says, only slowly do we learn what's truly important to us and align our outer and inner lives with that gravitational pull? So I think long-winded answer is it's a process. It's never going to end. And I think when we start embracing and start feeling like tension keeps bridges up, like that tension of I'm enough today, this is exactly what I want, and tomorrow it will change.

19:20My relationship with my wife, Peter, this is true, my relationship with my wife right now. We've been married over 30 years. My relationship with my wife has never been better. Like never. And Peter, gosh, I hope it's better tomorrow. You know, and the day I stopped saying that and same with my kids, like my kids are my best friends. It's so good. And man, I hope my relationship with my 28 year old daughter is even better tomorrow. I think that tension is embedded in the financial planning process. And I just think we need to be better about acknowledging it and being open about it. You know, you coach a lot of advisors on how to look beyond the spreadsheet, how to focus on these issues that are really important and how to do what I think we would all agree is more real financial planning as opposed to what people will say, hey, yeah, of course I do financial planning.

20:10As you coach advisors, I mean, are there things that you see people struggling with conveying messages to their clients? When And they come and they say, Carl, I'm having a hard time conveying this, that, or the other to my clients or my potential clients. What are some of those things that you're hearing most? Yeah, I mean, the most common is that, and I think anybody listening to this, especially clients of planners who hear this, the most common challenge is that the thing you show up, I call it the presenting problem. The reason that you reach out to a planner is often a tactical issue. It could be we're starting to realize how close retirement is, or we just sold a business, or we went on the first trip after having our second kid realize we didn't have enough life insurance.

21:03Like whatever it is, there's this presenting problem. And often the presenting problem is even investment performance, right? Like my portfolio is doing terrible compared to my buddies at the club or whatever. You show up for a plan. The hardest problem is that 24 months later, 18 to 24 months later into the relationship with a real financial planner, if you were to tell your friends what you value about that relationship, it would have nothing to do with the presenting problem. Clients don't say, oh my gosh, Sally's been the most amazing financial planner because we have a fantastically modeled efficient portfolio that's low cost and diversified globally.

21:43They say, I'm not worrying about money anymore. They say, I feel like I have enough or I'm on track or we have a plan or I'm not even thinking about it. Like that's what they say. But nobody comes into a financial planner's office saying, I would like to cry on your couch or please help me get clear about my goals. Nobody says that. And so I think that's the biggest challenge of communicating is that the presenting problem is really important. Like it's a long story about how this analogy came up. But if you had an arrow in your arm, you were out playing with a bow and arrow with your son and you had an arrow in your arm and you go to the emergency room and the emergency room doctor says, how's the flexion in your ankle?

22:24And what's your diet like? You're like, bro, get the arrow out of my arm. So the presenting problem is really important to deal with. And it's only important to the degree that it helps us align your use of capital with your life over time. So I think that's the biggest struggle is like trying to communicate the value. And I always found myself back when I had my firm, I always found myself saying to clients, like, I'm telling you right now, we're going to help you in ways that I can't even explain. You're just going to have to experience it. And to be honest, I don't know exactly what the thing will be for you, but I promise you in 18 to 24 months, there will be a thing and you'll point to it.

23:01And so that's the biggest challenge we have in our industry is the very thing people will value most has to be experienced before they can even realize it's a valuable thing. I love the presenting problem example. Let me challenge you a little bit. I just mentioned to listeners that you coach a lot of advisors. When I survey the listeners of this podcast, there are clients, there are other advisors, there are do-it-yourself investors. But the one common thread is that if you're listening to a podcast called The Long-Term Investor, You are probably interested in finance, and there is some chance that your spouse has a different degree of interest.

23:40Even if they're also interested, maybe it's just different. Maybe it's more. Maybe it's less. So I'm curious, for everyone listening, their significant other probably has a different viewpoint of what their presenting problem currently is. So coach our listeners, Carl, how would you suggest that somebody starts a conversation with their significant other about what they think their situation is or they're presenting problem or if there are any problems? And again, the book is a great conversation starter, but let's kind of dive in and coach those listening right now. How can they start this conversation?

24:15Yeah, it's super good question. And to be clear, I'm sure that your spouse or partner's view of the situation is different than yours, 100%, because it always is. And so the most valuable thing I've seen, I've probably had, I'm trying to be careful about exaggerating, but I think thousands is fair of conversations about money, certainly lots and lots of hundreds. And what I've noticed to be the most important thing is to just start paying attention. And there's a couple of essays actually in the book about this. I remember clients, somebody saying something like that one spouse was totally focused on wanting to pay down the mortgage and the other spouse was completely focused on investing.

24:59So they had a little bit of extra cash above so they could make extra principal payments on their mortgage or they could invest. And this turned into quite an argument, actually. And in those cases, if you can get to the value underneath it, right? And so get away from the presenting issue. Like, I want to pay down the mortgage. I want to make an investment. Let's buy some more real estate. If you can get below, like, hey, and all it takes is just one little question. First of all, noticing, like, instead of being sort of like in this unconscious, like, almost like I'm pushing my hands together, like butting heads, pausing and just saying, oh, wait, help me understand, like, what's behind that?

25:42It's really clear to me this is very important to you. Like, so now I'm the aggressive real estate investor guy. And I'm talking to my partner and I'm saying, my spouse, my partner, and I'm saying, and my partner just wants to pay down the mortgage. And in fact, this would be reverse in our relationship. Who cares, right? I can just say, hey, it's really clear to me that paying down the mortgage is important to you. It seems to keep coming up. Help me understand why that's important. So just some acknowledgement that it's really important. to you. I mean, Peter, you see this one probably all the time.

26:17One of the most conflict prone issues is education funding. Like I see this more often with couples, like one spouse is like, I paid my way through law school. They're going to pay their way through law school. And the other spouse is like, wait, I thought we were prepared to pay for Harvard if they get in. And often you discover this for the very first time in a conversation with a third party, like an advisor, maybe. So again, same question, man, it seems really important to you. Why is this important? And what ends up happening, like in the case of the mortgage versus investing in real estate, you get to a spot where you're like, oh, having a more secure financial future.