Reason #1 Why Retirements Fail — The “Die Broke!” Concept Is Dangerous
It is an author’s dream to come up with a book title that perfectly sums up a new idea that has taken hold of the public imagination. The book Die Broke! has such a title.
The “Die Broke!” concept is a radical one. The idea is that you should not aim to have lots of wealth to pass along to your children or to charities when you die but to use up every last bit of your accumulated wealth during your own lifetime, except perhaps for a few dollars to cover funeral expenses. I don’t like. This idea is going to cause a lot of busted retirements.
”Prudence” used to be the watchword in retirement planning. Now it’s “cleverness.” Retirees who worry about the next generation have humans who they don’t want to let down in mind when they do their planning. Retirees who don’t worry about the next generation or about passing a legacy along to a charity see the project as being a mathematical puzzle to solve — how to come up with the bucks to cover spending for x number of years in as little time as possible.
It can work. It also can fail. People who see retirement planning as being primarily the solving of a mathematical puzzle (it is of course indeed partly that) are more likely to make mistakes than are those who see it as a means of seeing that they live on (either through their children or through their favorite causes) after they take their leave of the Valley of Tears.
When your retirement plan includes something for the next generation, a near miss means that the next generation gets a little less than you anticipated. When your retirement plan aims at preparing you to die broke, a near miss means that you go hungry in your later years.
Maybe the kids will take you in.
Reason #2 Why Retirements Fail — Bad Calculators
There are articles at the “Risk Evaluator” section of the site explaining why most media accounts of how much you can safely withdraw from your stock portfolio in retirement are wildly off the mark. I won’t repeat what is said in those articles here other than to caution you not to trust any retirement study or calculator related to stock investing that does not clearly show the effect of changes in valuations on long-term returns.
Knowing what I now know about the conventional methodology safe-withdrawal-rate studies and calculators, I am wary of all retirement studies and calculators. There’s never just one cockroach, you know?
It’s not that mistakes were made; I see that as not being at all a biggie — it’s just one of those things. What alarms me is the lack of reaction in the conventional media to our findings that the Old School studies are analytically invalid. There seems to be a widespread feeling that it would be rude to ask the authors of the Old School studies and calculators to make the necessary corrections. Doing something about the severe life setbacks that will likely be suffered by the users of the discredited studies and calculators doesn’t seem to be a high-priority action item for too many.
What does that say about the integrity of the personal finance advice biz? Not something at all encouraging, in my assessment. I can’t speak about other sorts of retirement studies and calculators. It is only the safe-withdrawal-rate studies and calculators that I have studied in depth. Knowing what I know from that experience, I would be cautious about putting much confidence in the guidance provided by any retirement study or calculator. Even if there are terrible problems with the tool you are using, and even if those problems are well known in the industry, there’s a good chance that no one will have bothered to do anything to bring the problems to your attention or to have the problem corrected.
You need to use calculators when planning a retirement. The project lends itself to use of them because it requires planning for an unknown future. The trick is to make sure that you understand the methodology being used and that you think through carefully on your own whether that methodology makes sense for use in serving the purposes to which it is being put.
It is my belief that analytically invalid retirement calculators are going to cause millions of failed retirements in days to come. My personal take is that this is a bad thing.
Reason #3 Why Retirements Fail — Fear of Planning
People hate to plan. This comes up as a problem in every area of financial planning. People would save more if they prepared budgets. People would have more confidence in their investment strategies if they wrote them down. People would plan more effectively for retirement if they didn’t rush through the planning in hopes of moving on to activities they view with more favor, such as getting their teeth drilled.
I hope that we will be able to do some things to tackle this problem here in the Financial Freedom Community in days to come. Financial planning does not need to be a painful experience. We need to find ways to make it fun. I think that the key lies in getting people to think of financial planning as Life Planning. People enjoy talking about themselves and about their hopes for the future. We need to develop tools to make people see that financial planning is nothing more than drawing up a map for the journey from Point A to Point B.
Well-planned retirements don’t often fail. It makes sense to devote a good bit of energy to planning your retirement. The time you spend doing this minimizes the worry you will feel over the efficacy of your retirement plan for many years to come. It is time well spent.
Reason #4 Why Retirements Fail — Bad Timing
There are two comments in the article entitled “Community Comments on Using Stock Data to Diminish Retirement Risks” (see the “Risk Evaluator” tab at the left of this page) that made a big impression on me. Mikey says: “Some safe-withrawal-rate discussions are being held by people who are already in the belly of the whale but just don’t know it yet.” BenSolar says: “I posted a poll over at the Motley Fool board that was designed to gauge how many people started retirement during the record valuations of the 2000 bubble…. A surprisingly high percentage of respondents retired during that time.”
Some people are just unlucky. There has never been a worse time in the history of the United States to begin a retirement than January 2000. Stock valuations were so absurdly high that many aspiring retirees were able to fool themselves into thinking that they were financially ready to retire at a time when a clear-headed assessment of the realities showed that they were not. And stocks had been doing so well for so long that it is hard not to feel a good bit of sympathy for the retirees who were taken in by the stocks-for-the-long-run mumbo jumbo of the day.
We should do what we can to warn those whose retirements are on shaky footing. We have had limited success so far. It’s possible that we may see a greater openness to hearing a realistic message after the next big drop in stock prices and that there still will be time at that point for some of those whose retirements are in danger to take effective steps to move to higher ground. Let’s all hope that the human suffering that follows from today’s widespread indifference to the plight of the bubble retirees brings about an awakening to the importance of realistic retirement planning.
Reason #5 Why Retirements Fail — People Kid Themselves
The story that you hear a lot today from Baby Boomers who have not saved enough to finance a secure retirement is that they will work past age 65. I have no objection to the concept. People are healthier today and there is no good reason why people who enjoy work should not remain engaged in it well past age 65. I worry, though, that in many cases this solution to the retirement planning problem is being put forward as just another rationalization for not getting serious about saving.
People kid themselves about this stuff. You might intuitively think that it would be hard to do because retirement is about getting the numbers to work and numbers are cold and hard and objective things — how can you kid yourself about whether the numbers work out or not? It can be done. I’ve seen it done thousands of times. It can be done.
I’ve come over time to the counter-intuitive belief that it’s easier for a human to kid himself about a numbers-related topic than it is for him to kid himself about a non-numbers-related topic. The hard part of kidding yourself is convincing yourself of something that is not so. Numbers make the convincing part of the self-deception project an easy task because they are objective and thus convincing. The deception part is achieved through use of the phony ways in which the numbers are put together as support for claims that possess surface plausibility but that are in an ultimate sense illegitimate. Humans possess an amazing capacity to lie to themselves about what the numbers say. Numbers are used far more often to persuade people of things that are not so than they are used to persuade people of things that are so.
The moral here is to spend less time worrying about getting the numbers to work out right and more time being sure that you are shooting straight with yourself as to what the numbers need to show and whether or not they truly show it. You’re always going to get some things wrong; that’s all part of the wonderful game. You can always fix holes in your plan as they become apparent to you. It’s critical, though, that you engage in the retirement planning process with a clear-headed desire to learn the realities of what it is going to take to construct a safe retirement plan. Lose the capacity for straight-dealing with yourself, and there’s no telling how dark a road you are going to end up on.
Reason #6 Why Retirements Fail — The Cliff Model Adds Risk
The Cliff Model of retirement does not make a whole big bunch of sense. Retirements following the Cliff Model are those in which the worker switches from being a full-time employee on the night of the last day of his 64th year to earning not a penny ever again beginning on the morning of his 65th birthday. This is an artificial way to set things up. And it is an unnecessarily risky way to set things up.
The risky time for a retirement is the first 10 years. The problem is that, if you suffer big losses in your stock portfolio during those years, you lose out not only on the dollar amount of the losses but on the many years of compounding returns that would have been generated by the dollars lost in those early years. Also, the compensating factor when stocks go down hard is that this puts them at low valuations, from which long-term returns are likely to be juicy indeed; retirees who need to make withdrawals from their diminished portfolios to cover living costs experience only the down side of price drops and not the compensating factor that lessens the overall risk of stock investing for most others. If price drops come after 10 years of at least modestly appealing returns, the likelihood of needing to sell large amounts of stock to cover living expenses is greatly reduced. If you have put together a good plan, and you get through the first 10 years without a big price drop, you are not necessarily home-free but you are a long ways along the road to getting there.
So why not set up your retirement plan to protect yourself from experiencing big drops in accumulated wealth during the first 10 years of retirement? Moving to a lower stock allocation might help (that’s more likely to be so if you retire at a time of high stock valuations). Taking a part-time job for the first 10 years of retirement certainly would help. Another way to limit your vulnerability to suffering too big a hit in the early years of retirement is to follow a Plan B budget during those years, holding off on expensive travel until you have seen by the investing results that you have obtained in the early years of your retirement that you are going to make it to 10 years without your plan suffering any major hits. For example, if you were far ahead of your anticipated wealth level at the end of Year Five, it would probably be safe to move to your more free-spending Plan A budget.
Reason #7 Why Retirements Fail — People Live Longer.
When we live longer and are healthier for a bigger percentage of the retirement years, retirement costs more. This is another argument for working in retirement and for beginning to plan for retirement at an earlier age.
Reason #8 Why Retirements Fail — The Common Feeling That There Is Safety in Numbers.
The biggest reason why many do not plan for retirement is that they see others not planning for retirement. The scare stories that are used to persuade people to plan frequently backfire. Stories that intimidate people often cause them to feel even a greater reluctance to face up to the realities and put together a plan.
The core theme of this site is that we need to see saving as a positive goal, not as something we do to prevent the nightmare of a destitute old age. We need to begin selling a positive vision of retirement. One way to do that is to customize the retirement vision. People need to begin thinking of their retirement as their retirement and their retirement only.
There is no safety in numbers. We each need to take care of the one retirement we care about more than any other. The first step to getting there is to begin thinking of retirement as something we can structure to best suit our own personalities. We don’t all work at the same jobs, we don’t all go to the same places on vacation, and we don’t all drive the same types of cars. We need to begin thinking of “retirement” as a more flexible concept than we have come to think of it during the “an-age-65-retirement-fits all” era of retirement planning.