It Doesn't Pay to Be Too Optimistic About Your Finances

Financial planning underpromise and overdeliver
Financial planning underpromise and overdeliver

While it's OK to be wildly optimistic in many areas of life, a Pollyannaish attitude about your future financial well-being is not recommended.

No one knows this better than Wall Street executives. When the top brass fail to deliver the results that they promised -- even if it was a lowball promise -- the backlash can be brutal. Consider:

  • Dry bulk shipper DryShips (DRYS) saw its shares plunge more than 12% intraday after reporting results in late August that were well below estimates.

  • In late August, OmniVision Technologies (OVTI), which makes illumination-related products for smartphones, reported that it expected to take in around $255 million to $275 million in its second quarter. Analysts, however, had expectations of more than $300 million. Boom -- shares plunged about 30%.

  • On a more positive note, for its latest quarter, Sirius XM (SIRI) posted revenue results slightly below analysts' estimates. However, it made up for this on earnings, which were roughly triple expectations. The company's shares, which had closed at $3.11, opened the next day at $3.18.

For most companies, a few surprising earnings reports won't be make-or-break, and the resulting stock moves don't always last for long. However, these examples do suggest that there is something to be said for actually planning for the worst and then being happily surprised when you're able to beat expectations.

Underpromise and Overdeliver for Your Future

A better approach for managing financial matters is to hope for the best, but plan for the worst; in other words, underpromise and overdeliver.

What does this look like in practice? Well, start with the knowledge that the stock market, over much of the past century, has averaged about 9% or 10% annual returns. But that's no guarantee of future performance, and many expect the coming decades to feature a lower average.

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When calculating what you need for your nest egg, build in conservative estimates. Instead of 10%, use 6%. Lower returns mean you'll most likely have to save more; find out how much more with this handy calculator. (Think of the "interest rate" as the rate at which you expect your investments to grow.)

For example, if you have $50,000 socked away and you expect to add $5,000 annually and earn 10% over the coming 25 years, you'll end up with about $1.1 million, which might provide for a pleasant retirement. But if you expect to earn just 6%, your $50,000 and $5,000 additions will amount to only $505,000, less than half as much. Adjust your annual investment to $10,000 and presto -- you can expect to accumulate nearly $800,000.

Even if you end up averaging an even lower return, by having increased your investment amounts, you'll end up with more money than you would have originally. And if you end up with 10% returns or more, great! You'll be able to live higher off the hog in retirement, or will be able to leave more to your heirs.

Prepare and plan for a challenging few decades ahead, and your portfolio may surprise you by growing larger than you expected. By underpromising your growth rate to yourself, you set your nest egg up to have a good chance of overdelivering.

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Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio.