Published On: September 1, 2022
Written by: Ben Atwater and Matt Malick
The German mathematician Carl Jacobi and the billionaire investor Charlie Munger share a similar mantra, “invert, always invert.”
Fundamentally, this means thinking about something by upending it. In the case of Jacobi, this meant reformulating a math problem or a scientific hypothesis in an inverse form. For Munger, it means thinking more about what can go wrong with an investment than what can go right with it.
Famously, more than 60 years ago, Munger even inverted the thinking of Warren Buffett. Munger discouraged investment in poorly run companies sporting the lowest valuations, instead turning Buffett’s focus toward finding excellent companies at fair prices.
We can apply inversion to most life scenarios, including financial planning concerns.
For most healthy couples, it would make mathematical sense for the higher earning spouse to wait until age 70 to collect Social Security. But many people cannot come to terms with delaying Social Security beyond their full retirement age (FRA). In their minds, they simply cannot pass up a benefit that is available to them in the here and now.
But a deeper dive reveals that the survivor benefit for a married couple is the higher of the couple’s Social Security amounts. Often then the best way to think about Social Security is not the benefit you can get now, but how a higher Social Security amount would help a surviving spouse years down the road.
Life insurance is another area where we need to invert. Life insurance (even term insurance) premiums can be expensive, not to mention the aggravation of underwriting. This process involves a large list of questions, a medical exam and the suspense of waiting for the insurance company’s decision, including the determination of pricing based on your health exam. It takes some commitment to give up your money and time today in exchange for a future payout that you hope never happens.
A useful starting point when considering life insurance is a death benefit approximately equal to five to ten years of your workplace earnings plus your outstanding debt minus your liquid investments (and any assets that your survivors would likely choose to sell, like a business, vacation home, exotic car, etc.).
Much like life insurance, estate planning is another morbid consideration people often avoid. But, again, think past the here and now and think about your family down the line. Death brings enormous sadness and stress on survivors. Having a well-considered and well-communicated estate plan helps families focus on celebrating and mourning a loved one.
Having difficult estate-related conversations with family during your lifetime gives time for understanding and acceptance while you are still around to address questions and concerns. The inverse, of course, of finding out someone’s plan (or lack thereof) after their death can be a source of confusion and bitterness.
These planning scenarios all revolve around doing something in the present that is often the opposite of what you would like to do, but that has the potential to benefit others in the future.
This form of inversion relates to many financial planning ideas like prioritizing saving over consumption, investing when the market is beat up and being proactive instead of reactive.
We do not know the future. Therefore, it is worth inverting your natural thinking and challenging your assumptions from at least one other perspective. So please take time and turn your thinking inside out, if only as an exercise.