The very essence of financial planning is about helping clients to formulate the strategies to achieve their goals. In this context, the role of the financial planning is to help clients articulate their future goals, and then provide recommendations for how the client can best achieve them.
There’s just one problem: research suggests that we’re not actually very good at figuring out what our future goals will be. The fundamental challenge is that, despite recognizing how much we change over time (think back on how different you were 5, 10, or 20 years ago!), we just don’t know how to envision the ways we’ll be different in the future. In fact, researchers have dubbed the phenomenon the “End Of History Illusion” – we just don’t know how to project a future that’s any different than the today (which is the end of our personal history as we know it).
From the perspective of financial planning, and the rising popularity of goals-based investing, the challenge of the End Of History Illusion is that we may be encouraging retirees to save towards a vision of retirement that they won’t actually care about when retirement comes. This doesn’t mean that retirement itself won’t be relevant, but that vision of a particular retirement home, vacations, a boat on the lake, or a certain lifestyle, may not actually be very desirable when the time comes.
Which means investors should actually be cautious about tying their saving and investing habits in a way that over-commits to a particular and specific long-term goal. Instead, if we recognize the uncertainty of future goals themselves, planning for flexibility to adapt to future goals may be more effective than investing for the goals themselves!