Brian Hufford, CPA, CFP®
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One of the leading financial advisors at our firm, Brian Blanton, CPA, and I are trying to create a financial flight simulator. For years we have realized that dental financial issues are not just complex, but hyper-complex when viewed in terms of maximizing wealth creation during a 35-year dental career.
While we have many tools at our disposal, such as financial planning software, Monte Carlo simulators, and dozens of MBA-like spreadsheet models, what is really needed is a tool to actually simulate hyper-complex outcomes with simplicity. What is needed is a financial flight simulator. Let me give you an example.
What is the largest financial decision you have made in your career thus far? Was it purchasing a practice, building an office building, or buying a house or condo? How did you approach this decision?
Let’s take building a dental office as an example. As humans, we want to make complex decisions as simple or linear as possible. For an office building project, even the linear elements are complex. The linear elements are things such as the location of the space, the interest rate on the mortgage, and the income tax advantages related to ownership.
The decision to go ahead with a building project is typically made at an emotional level based upon the perceived affordability of the monthly payments, colored by the doctor’s overall confidence in the future. The linear aspect of decision-making in this manner is that the project is viewed in isolation from other goals, such as getting out of debt or being able to retire. The final decision to proceed with the project may be based simply upon cash flow this year.
The hyper-complex elements of the building decision are typically not addressed. Let’s say that I define a principle financial goal as maximizing wealth creation by “arriving at age 65 with the highest amount of savings possible with no debt.”
Further, let’s say the decision to pursue the office building project must support that goal. It’s one thing to find the lowest interest rate on a mortgage loan; it’s quite another to understand how a building project affects wealth creation at age 65. Perhaps I need a crystal ball instead of a financial flight simulator!
My experience tells me that it is typically not the unknown factors that sabotage wealth creation (such as how will real estate appreciate or depreciate in the future); it is the factors that could be modeled or simulated that are the problem. In other words, the factors we can control, but do not, are the biggest problem.
This is how I would want my financial flight simulator to solve the hyper-complex issues.
First, I would want to know how much savings I would need at age 65 to support my retirement needs. Then I would want to simulate or model how everything affects everything else with my building project while documenting every scenario. I would want to model the end result of the following: changes in production, changes in overhead, the effects of rapid or slow debt repayment, the ultimate sale of the office building, saving now vs. saving after the debt is reduced, and the tax effects of the project.
Finally, I would want to model the uncontrollables: changes in the economy, changes in investment returns, and other unexpected events. While all of this seems — and in fact is — extremely complicated, computers make the analysis relatively easy. It is certainly no more difficult than simulating the effects of movements of elevator and rudder controls in wind shear for an airplane.
The upside of a great financial simulator is mainly a function of enlarging the vision of why we work. If we are working to simply have a great office building, then the focus of solving the linear challenges of interest rates and affordability are sufficient. If our vision is having a great office building, and ultimately being able to retire with a high level of confidence, then we have to understand how everything affects everything else. This is a hyper-complex problem. Perhaps financial wisdom would say that if the problem is complex, simply “research it.”
How do I get the lowest interest rate? Consult several lenders and find the lowest rate. If the problem is hyper-complex, one must “simulate it.” How do I build my dream office, retire my debt, save taxes, and end up with enough to retire? I need a financial flight simulator to work through all the issues.
In summary, if I can fly a Boeing 747 on my Xbox, surely a great financial flight simulator is not beyond reach. So surely, a dentist should be able to pursue dreams like a great office space and still be able to retire.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064 or firstname.lastname@example.org.