A DECADE AGO, a large financial firm ran a clever advertising campaign that showed people going about their everyday lives carrying a bright orange six- or seven-figure sum that represented their number—how much money they needed to retire. It was clever because we humans like to simplify—and sometimes oversimplify—complicated issues. It’s one of our cognitive biases.
I spent almost 40 years in aerospace engineering. I did a lot of detailed engineering analyses, calculating expected performance numbers, which could then be compared to a particular project’s requirements. Government agencies frequently provide guidance on how to perform these analyses and what results are acceptable. Even though this was “rocket science” in the popular sense, the process was—in many ways—straightforward. The physics were well understood and, more important, we had a good grasp of the problems we were trying to solve.
My love of analysis is one of the things that attracted me to financial planning. My engineering expertise seemed like a great fit for doing complex retirement projections. I could even use my background in so-called Monte Carlo analysis. At work, we used Monte Carlo techniques to analyze complex thermal radiation problems, but in finance it’s used to look at how a portfolio might fare in countless market scenarios.
Indeed, I was sufficiently jazzed about financial planning that, several years ago, I purchased sophisticated commercial planning software. I was excited to build a “professional” grade model to assess our retirement readiness and evaluate alternative scenarios. In preparation, my wife and I discussed our vision for retirement. I used that information to build a matrix of scenarios, varying a large number of parameters like inflation, retirement dates, vacation budgets, Social Security claiming strategies and long-term-care options.
Housing in retirement was a key subject. We own our primary home, plus a vacation home at the New Jersey shore that we rent out each summer. I analyzed a variety of scenarios, including keeping both homes and renting out the shore house, keeping both homes and not renting, and selling our primary home and moving to the shore. To look at long-term-care needs, I ran scenarios where we sold all real estate at age 80 and moved into assisted living. To account for variations in portfolio performance, I used Monte Carlo analysis.
Needless to say, this generated a wide array of outcomes, but generally the results looked great. There was a little less margin for error in the fancier lifestyle cases—my term for owning two homes—but it still wasn’t bad. I felt good about our retirement plan.
But when I sat down with my wife to deliver this news, it did not go well. I presented an overly complicated and confusing set of results that muddied the picture. There were myriad charts showing income and spending profiles. I presented Monte Carlo results with 1,000 different portfolio trajectories. The message got so garbled that she ended up in tears. I had so overwhelmed her with data, scenarios and assumptions that she had no idea if we had reached our number or not.
In retrospect, I learned that the idea of a single number is compelling, even if it isn’t realistic. After my initial failure at communicating the results, I tried a different tack. I took a narrative approach. I explained to my wife that we were on track for a comfortable retirement. At some point, we would probably downsize to one home. Where that home would be, and when we’ll downsize, wasn’t certain. It depended to a large degree on our children and grandchildren. The large number of scenarios I looked at indicated we had some time and flexibility to make those decisions. We also should have enough funds to cover quality senior living. We’d continue to review and discuss our plan, I told her. I expect we’ll do that throughout retirement. I also learned that her concerns were less financial and more about staying vital, active and healthy. She trusted me with the numbers and didn’t need to understand every calculation.
What did I learn? By all means calculate your number. But when you think about that number, recognize that it represents the sum of your hopes and wishes for a happy and healthy retirement. With that in mind, try to build a plan that includes some margin of safety, so you have the flexibility to deal with the inevitable—and often unexpected—changes to come.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles were Taking Your Lumps, Quiet Heroism and Think Bigger. Follow Rick on Twitter @RConnor609.