Calculated Risk

Richard Quinn

SOMEONE POSTED THIS comment on a Facebook retirement-planning group that I follow: “My plan is based on my spouse and I living to 95 and 94 respectively. Our paid house is now worth about 900K. I am comfortable it will appreciate at 5% per year. The plan shows a 75% chance of success. If we sell the house at 85-84 and rent at a retirement community the success goes to 99%. We could cut back on expenses and that 75% chance would improve but why do that if I don’t need to?”

I suppose that, if the commenter changed his longevity assumption to age 80, his success probability would increase as well—but I wouldn’t advise it.

This person is using retirement-planning software that requires numerous assumptions, such as his estimate that his house will appreciate 5% a year. Given that, even with that assumption, his plan has a 75% chance of success—meaning there’s a 25% chance that he and his wife will run out of money—it seems there may not be sufficient investments to meet their needs.

Then there’s the old “cut back on spending” strategy. Who would retire with a 75% chance of success—based on all the variables and assumptions in the software—and then have spending less as the backup strategy? And yet several people commenting on the post said they’d be fine with a 75% chance of not running out of money. Talk about sleepless nights.

We don’t know how old this couple is, but selling a house around age 85 is a big gamble, as is the assumption that they can simply rent in a retirement community at that point. Selling and moving is a big hassle—not something I’d recommend at that age. I sold and moved home at age 75, and I don’t recommend that, either.

Moving to a retirement community may take time. Places might have waiting lists and, depending on the type of facility, may require relocating a considerable distance. On top of that, the cost could be more than maintaining a house.

Suddenly, the Facebook discussion took a strange turn. Someone asked: What withdrawal percentage are you using in the planning tool? The answers from various commenters ranged from 0% to 5%. The person claiming 0% said he’d just take money as needed. I wonder how the planning tool incorporated that strategy.

Another contributor said he and his wife will be retiring early, and plan on withdrawing between 5% and 8% from savings in the years before collecting Social Security at age 70. I wonder how many years, with withdrawals at 5% and above, we’re talking about.

Most of the people in the discussion weren’t yet retired, but they had great plans, great assumptions and apparently great confidence. They relied on planning software to tell them if they’d be successful or not.

In my opinion, it’s impossible to plan every year of retirement. Instead, I think the surer strategy is to start retirement with an adequate income stream, whether from Social Security, investments, income annuities or a pension, that’ll allow you to maintain your pre-retirement standard of living. If that income stream is adequate, chances are you won’t run out of money.

If, after you retire, you fancy a luxury cruise, you save for it or take the money from a designated travel fund, just as you should have done before retirement. You also ought to maintain an emergency fund, again just as you (hopefully) did while working.

Retirement-planning software is helpful, but it’s no replacement for common sense. Tweaking your software inputs may make your plan “work,” but it may also give a false sense of security. Somewhere outside those software programs there’s a potential whammy. My advice: Don’t press your luck.

A rough calculation tells me that, in my 13 years of retirement, at least $100,000 of unanticipated expenses have cropped up, including tree and oil tank removal, HVAC units replaced, dental work and more. I could add an additional $200,000 in unplanned discretionary spending that was a necessity or deemed to be: new kitchen, two new bathrooms, a new deck, a new car. I wonder if the planning software has a place to enter “spouse would like” under future spending?

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