Retirement and Risk

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.

7 thoughts on “Retirement and Risk”

  1. I agree.

    Those calculators (while valuable) always assume constants ie you spend the preset amount each year (from the 4% rule or whatever) and depending on the situation you might run out of money.

    The reality is that you aren’t going to keep spending your ‘normal’ amount of money until one day you run out. It’s a lot more likely that you will adjust and compensate (ie cut costs, work part time etc) to prevent running out of money so the 81.5% success rate Adfecto mentioned is probably more like 95%+ in real life (and in my opinion).


  2. A useful tool I found while trying to assess some possible outcomes of my retirement planning can be found at
    This blog analyzes the historical returns of the S&P500 since 1871 and developed a nice calculator whereby you can punch in a holding period of your investments and it will give you the best, worst, and average case returns of that investment over that time period. It gave me a range to go with and showed me that even if I am met with the worst case scenario, I’ll still be ok.

  3. Thanks for the plug, Pharmadaddy!

    We’ve also modeled a “what if” scenario, where we wondered what would happen if an investor consistently earned the worst rate of return ever recorded for the periods over which the money they put in annually until the end of the investment.

    As an added bonus, we also did the math comparing our model of the absolute worst of the S&P 500 vs the safest investment on Earth.

  4. Mike,

    Excellent point. I already know I won’t be spending the same amount each year. After all $2000 of my yearly is for home repair and car replacement. I intend push of using those amounts for while by getting any last replacements done prior to quiting my job.

    Pharmadaddy & Ironman,

    Ya new toys to play with! Thanks for the links I’ll have to check them out.


  5. Risk is part of life as it is part of investing. We take risks every single time we move. The drive to the store, filling up the gas tank, taking a vacation. We don’t think about the everyday risks we take. Yet we worry to no end about our long term investments.

    Who really cares if the market is down this year? If we own investments in respectable companies it really doesn’t matter. What we need to think about is how to maximize our investments in them. During the last downturn in 2002, I increased my investment amounts and the payoff was well worth it when the markets recovered. Again this time, I am increasing the amount I invest to take advantage of the bargains.

    People buy GIC’s and park their money in the bad times. Why? It’s a good opportunity to invest when you have a long timeline.


  6. Whilst I agree you cannot protect yourself 100% you do need to be aware of what can “eat” your Nest Egg over the long term apart from Inflation and Taxes and take some action to manage it.
    For instance I was paying fees of 2.24% to my Financial Advisers. I then read John Greaney’s and discovered how compound interest on Fees can take more of your Nest Egg that you do in 30 years. I want my Kids to have what’s left, not my financial planner. So I switched my investments
    out of the high fees WRAP.
    I also found out from Jim Otar a financial planner (and a fellow engineer and a Canadian like yourself) in his article “Time Value of Fluctuations” that if you lose 20% of your Capital and take a 4% pension you will need a
    gain of 43% over the next three years to just get your capital back. He includes a real-life example in the article too. So that tells me to make sure I do not have large losses and to use Stop Losses to exit the market some of the
    time. Cash is a position.
    There is a big difference in strategy for retirees vs. someone still working. Distribution of the Nest Egg is not just reverse Accumulation. Reverse Dollar-Cost-Averaging for a pension can cause harm to a Nest Egg when in retirement.
    As Retirees we can run out of money doing everything right if we do not understand all that can “eat” our nest egg.
    In retirement we should not rely on the market coming back because it may not come back within our retirement time “window”, even if it does come back “in the long term”.
    As a retiree I have learned the most important thing in retirement is to protect my Nest Egg against large losses.
    It is the downside risk you have to plan for because it is so hard to replenish your Nest egg when there is inflation, taxes and a pension to be taken out of it whilst it is trying to recover.
    The point is we have to make sure we understand how the numbers work in retirement. It doesn’t mean we have to
    become obsessed about protecting our Nest Egg, just informed of how we can minimize costs, minimize losses and actively manage it with our financial planner if we use one.
    I do have income from other sources but why should I let my Nest Egg be eaten by things I can avoid with a little knowledge and some planning. I worked too hard to make it.


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