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In a recent post, I focused on many people’s desire for a 100% chance of not running out of money in retirement. The way calculators define retirement “success,” i.e. not running out of money regardless of how much you have at the end of your life, reinforces this notion.
This ignores the counter risk of running out of life before running out of money. It often results in substantial over-saving/underspending.
I got a lot of positive feedback on that idea. As a writer that positive feedback feels good. However, I want to be careful not to oversimplify and create an echo chamber.
As much as I desire simplicity, retirement calculations are inherently complex. Outcomes are dominated by variables that are unknowable and largely out of our control. They include investment returns, interest rates, inflation, your lifespan, and personal health (and thus health care spending), and potential changes in the law that could impact taxes, Social Security, and health insurance.
Many of the positive commenters who praised the idea of not being overly conservative cited their personal retirement decision and spending in the past 10-15 years. The rest of us have been saving and investing during that time. We’ve all experienced incredibly favorable market conditions.
So, it is worth considering whether we’ve made good decisions or whether we’ve just been lucky to have such positive outcomes. If you are assessing your own retirement readiness, it is worth considering how heavily to weigh the input of those who recently preceded you.
Evaluating Uncertain Decisions
This winter I had one of my best days ever in the mountains, backcountry skiing with three friends. We put the trip on our calendars weeks in advance with no way of knowing the forthcoming conditions.
A few days out, the avalanche report didn’t look promising. We had a big storm mid-week. High winds were forecasted to follow the storm. I watched avalanche reports closely and with concern.
We decided to at least ski in about 3 miles to a friend’s cabin on Saturday. After digging everything out, we built a big fire and shared an amazing meal. On Sunday, we woke early to a beautiful bluebird sky and a favorable avalanche report. The snowpack stabilized considerably over the prior two days.
We got out early and traversed in about another half mile before climbing several thousand feet to an isolated peak. We continued to assess the situation as we approached and climbed. Eventually, we arrived at the summit with untouched snow as far as the eye could see.
We had an amazing ski run through knee-deep powder. Then we skinned back up for another run before deciding to call it a day, an incredible one at that. Even so, I questioned our decision making.
- Were we lucky or good?
- If the avalanche report or our observations weren’t favorable, would we have been smart and turned back? Or would we have forged ahead given our sunk costs of time and effort applied, plus the appeal of that deep untouched snow under a sunny clear sky?
This kind of post hoc analysis is common among my outdoor mentors. It’s something I do after each day out in the mountains.
Post Hoc Analysis
This type of analysis is not exclusive to mountaineers, climbers, and other outdoor adventurers. Poker players are another group that frequently have to make consequential decisions in the face of uncertainty.
Professional poker player Annie Duke has written extensively about evaluating decisions made in such circumstances in an effort to improve future decision making. She points out that we all have biases that tend to color our evaluations, whether of our own decisions or those of others.
She uses the term “resulting” to describe the way most people analyze decisions based on outcomes. As Duke describes this process we tend to think if we had a desirable result it means we made a good decision. To the contrary, if we didn’t have the outcome we desired it is often attributed to bad luck.
This process leads to a lack of learning and thus not making better decisions moving forward. Instead, she recommends assessing whether you made a quality decision based on the probability and consequences of a particular outcome given the information available at the time the decision was made.
Are You Resulting?
When I interact with readers and advise clients, I sense there is a lot of resulting going on among investors and retirees right now. Many people think they are better investors than they probably are. They don’t seem to fully understand the risks of different investments and the role luck has played on recent investment returns and retirement outcomes.
A Good Year or a Sustainable Strategy?
Here is one comment I recently received. “I spent $130K last year and my nest egg is only down $25K…. I think I’ll be okay. I continue to be data-driven and not fall prey to fear about market crashes, health-care costs, and all the things I’m constantly told might ruin or kill me.”
This feels like resulting. Last year, the US total market was up 26%. If you included international stocks in your portfolio, they were up about 15.5.%. Total bond funds returned nearly 6%. Speculative investments did well. Gold was up about 13% while Bitcoin more than doubled in price. After an extended period of low interest rates, even cash again provided a significant return.
Was this individual lucky or good? We don’t have enough information based on what was shared to know. There are things we do know.
It was hard not to make money in 2023. Seeing a portfolio go down in value last year would mean spending at a relatively high rate that is highly unlikely to be sustainable for long periods of time.
That may be appropriate for the individual writing the comment depending on their specific circumstances. It is likely not sustainable for most people reading this.
A Lucky Decade or a Repeatable Result?
Another reader recently wrote the following. “Seriously, my only regret with retiring at 58 was why I didn’t do it earlier?…. We do not live frugally or frivolously, but we have much more coming in than we spend…. Yes I had more financial concerns when I was 58 than I do now at 68.”
I don’t know the specifics of this individual. Again, this feels like resulting. Ten years ago was 2014. I ran a few backtests on Portfolio Visualizer.
Over the past decade, a 60% stock/ 40% bond portfolio could have sustained a 4% initial withdrawal adjusted for inflation and still grown by 3.95% annually (1.13% when adjusted for inflation). A $1 million portfolio would have grown to nearly $1.5 million ($1.12 million inflation adjusted).
A 100% allocation to US stocks would have done much better. Even after taking a 4% annual withdrawal, that portfolio would have grown by 8.13% annually (5.20% adjusted for inflation). A $1 million portfolio would have grown to nearly $2.2 million ($1.66 million inflation adjusted).
If you retired at 58 and a decade later had a larger portfolio than you started with while also having Social Security benefits coming online, you should indeed feel very good.
But was that a result of good planning and investing? Or was it largely good luck? We don’t have enough information to know for this particular individual.
Testing Different Periods
We do know these same portfolio and drawdown scenarios in the previous decade, 2004-2013, were generally OK, but not as favorable for either the balanced or stock portfolio when compared to the most recent decade.
Switching the start and end dates to 2000-2009 paints a very different picture for any portfolio with stocks. However, more bond heavy portfolios held up better.
I encourage you to do your own backtests. Use tools like those provided at Portfolio Visualizer or Portfolio Charts.
Consider longer time frames, different time periods, and a variety of asset allocations. Observe the role that luck plays and how differently the same strategy can play out under different circumstances.
Two Things Can Be True
It is true that many natural savers and planners (i.e. many if not most of you reading this blog) tend to be conservative, sometimes to a fault. Retirement calculators tend to reinforce that conservatism.
Any outcome where you outlive your money is a “failure,” even if you’re projected to run out of money after you are likely to have taken your last breath. Any outcome where your money lasts longer than your life is a “success.” This is true if you die with $1 or $10 million.
Clearly there is a need for nuance.
However, it would be equally faulty to look at other recent retirees, assume you can just do as they did, and throw caution to the wind. Your results may be far different.
This gray area in between these extremes is where good planning can happen if you have a solid decision making framework. Do you?