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Retirement and Risk

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It seems to me one of the biggest issues around planning retirement is the complete fear that grips people while they do it. I see people putting safety factor on safety factor while assuming the worst case at every corner. Why? They are terrified of taking a risk and running out of money.

Yet that isn’t a normal fear. Almost nothing in this world is 100%, so why do we insist on it for our retirement. For example, do you know if you will be at the same job in five years with 100% certainty? Likely no. Do you know if you will still be married to your spouse in 40 years with a 100% certainty? I would like to say yes, but in reality it is no. I simply can’t predict the number of things that might happen.

As a case in point there was a comment left on “How much do you need to Retire” series about my plan by Adfecto which I will quote “Your $475,000 nestegg with $26,000 in annual spending gives you only an 81.5% chance of success (according to FIREcalc)” For those of you not familiar with FIREcalc it runs your portfolio though a historical series of returns to see if your portfolio could survive Black Monday and the Crash of 1973. For me personally, 81.5% probability of surviving both events is actually fairly damn amazing.

Perhaps it’s my engineering background here coming into play. You see at work I almost never expect 100% from anything. Why? Mathematically speaking it isn’t worth the cost. Something that does 90% of the job and costs $200 million would likely cost $400 million to reach 99% and likely you can’t even buy 100%. Why? Because as you reach for that last 10% your costs usually go up exponentially. So the higher % the more it costs. That’s why if someone says I should have closer to $675,000 to make my FIREcalc 100% and cover a 50% drop in government benefits I think they are crazy.? The extra cost isn’t worth it.

You see here’s the rub.? I could save more money, but in reality it doesn’t buy more safety.? You still might get hit by a bus the day after you retire, so all your extra savings isn’t going to help you.? You might get wrongly accused of a crime and spend your retirement in jail for five years fighting it.? Neither of these event are highly probable so we normally don’t worry about them.? Yet when we talk about retirement we start looking at extreme events and plan for them like they should be normal.

This isn’t to say I don’t feel people need to do some reasonable planning.? A healthy nest egg and a paid for home are good ideas.? Have some idea of backup plans in case things turn out a little different is also a good idea.? So perhaps you do a little part time work for extra spending money or you cut back the vacations a bit.? Would it really be the end of the world if you had to do that?? For me, not a problem.? I’m ok with a few backup plans.

Yet in the end retirement does involve risk.? There is no way around it and no amount of money can avoid it.? Risk is a normal part of life.? Yet if you worry too much about risk it can control your life.? Don’t let risk control your retirement as well.