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ONE SPRING DAY IN 2022, an elderly woman entered Paris’s Picasso Museum to see a new exhibit. Among the items on display was a decorative blue jacket, which was positioned on a wall next to a portrait of Picasso.
The woman liked the look of the jacket, so she took it down from its hook, put it in her bag and quietly walked out the front door. Only later did the museum discover the theft, which was made even more embarrassing by the fact that it had been robbed several years earlier and had—so it thought—upgraded its security.
What lesson might we draw from this odd event?
Some might see it as a reminder that the world is full of risks, and that risk can materialize when and where we least expect it. If even a well-guarded museum can be outsmarted so easily, then maybe we all need to look for ways to harden our financial defenses. That would be one conclusion.
Another, perhaps opposite, conclusion would be to acknowledge that the risks present in the world today are actually too numerous and too varied for any of us to adequately guard against. In light of that reality, maybe the rational thing to do is to worry less. In other words, we shouldn’t spend our days trying to harden our defenses, since it’s an illusion to think that we could ever really succeed.
Another reasonable way to look at the museum theft would be to recognize it as an outlier. Since the risk of oddball incidents like this is so small, we really shouldn’t let it affect our thinking one way or the other. Oddball events shouldn’t cause us to spend our days battening down the hatches and, at the same time, they shouldn’t lead us to simply throw caution to the wind. We shouldn’t draw any conclusion from them.
Instead, we should put risks like this in the same category as other extreme events, like earthquakes or volcanic eruptions. Yes, we can acknowledge that they carry non-zero probabilities, but also recognize that they’re so rare that it doesn’t make sense to factor them into our thinking.
Which of these approaches to risk management makes the most sense? I’m not sure there’s an easy answer. That’s because risk management, in my view, is one of the toughest concepts in personal finance. For example, a recent article in The Wall Street Journal was titled “Even Rich Retirees Fear Outliving Their Money.” It describes a paradox that economists refer to as the “consumption puzzle.” Studies have found that retirees are happier when they spend more, and yet—on average—retirees appear to spend much less than they could afford to.
The article references a new paper in which retirement researcher David Blanchett quantifies this phenomenon. Using the 4% rule as a benchmark for a reasonable portfolio spending rate, Blanchett found that retirees spend, on average, just 2.1%. The upshot: They could afford to double their spending without materially jeopardizing their plans.
Why are these folks spending so little—and why, on the other hand, do some people spend so much more than they can afford? My guess is it’s because risk is intangible and it’s complicated. It takes many forms and, as a result, it’s hard to quantify and thus hard to manage. The result: When we ponder risk, we tend to lean on emotion, instinct or rules of thumb. But there is, I think, a better way.
When I was in grade school, I had a friend named Gene. He was first-generation American, his parents having come from Italy. One summer, his parents let me tag along when they traveled back to Italy to see family. Two observations from that summer have stuck with me and, over the years, have formed the basis for how I think about risk. Let’s look at each in turn.
Gene’s family lived in a small mountainside town, but before we could make our way up there, we stayed for a night with a cousin who lived in downtown Naples. Especially then, Naples was known for its tougher neighborhoods, which I learned when our host locked up for the night. First came the usual chain and dead bolt. Then, from the opposite wall, he lowered a metal bar, which he wedged up against the front door to form a sort of barricade. Finally, he pulled down a bar from another wall and wedged that into place against the door as well.
Was this fellow a worrywart? I don’t think so. My sense is that he simply knew his neighborhood and was being rational. That provides us with the first pillar of risk management, which is to recognize that risk is personal—that we all face different risks. For Gene’s cousin, personal safety was most important, and so that’s where he focused his efforts. For others, risk takes different forms. The key is to assess the risks that might be most relevant to you and then to load up on protection in those areas.
In many cases, that protection will take the form of insurance. If you’re a young parent, life insurance is likely the highest priority, and my advice is to err on the side of over-insuring. Similarly, if you rely on a single income, it’s vital to carry disability coverage, expensive as it is. What if you serve on corporate or nonprofit boards? Be sure you’re covered by directors and officers insurance. If you have a Porsche or a pool—or teenage boys, as in my case—you might consider extra umbrella coverage. But these are just examples. The most important thing is to avoid generic approaches, and instead to identify and manage the things that pose the greatest risk to you.
What’s the second ingredient for managing risk? Later that summer with Gene’s family, we went on a day trip with another relative. What I noticed was that the driver initially wasn’t wearing a seatbelt. But as soon as she got on the highway, she buckled up and made sure everyone else did too. I didn’t ask questions, but my guess is she did that because she perceived the highway as being more dangerous. In fairness, that was a long time ago, but data show that this risk assessment was inaccurate. City streets actually pose a greater risk. That brings us to the second key pillar in risk management.
When deciding which risks to protect against, it’s important first to have a clear picture of those risks. To be sure, this isn’t always easy. Indeed, insurance companies have departments full of actuaries, and even they sometimes make mistakes. The key, though, is to avoid intuition, and instead to look objectively and think systematically.
As we move into the new year, my recommendation for financial housekeeping would be to conduct an assessment of the risks that might matter most to you. Could you afford to loosen your belt in some areas? Is some tightening in order? Is there anything you’re overlooking? Like changing the batteries in your smoke detector, a risk audit like this is worth a periodic review.
And what about the Picasso Museum? It lucked out. About a week after the theft, the same elderly woman walked back through the doors. It turns out that her memory was slipping, and she didn’t realize what she had done. Police were able to locate the coat at her home, and she had no problem returning it. The only issue: She’d found it too big and during the time that she’d borrowed it, she had it tailored.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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One of the key risks that causes “underspending” in my opinion is the extremely realistic belief that funds will be needed for long-term care. The insurance industry can’t quantify these costs accurately (hence the unavailability of unlimited coverage policies any longer), yet researchers act astonished when retirees are cautious about spending their available funds without regard to future LTC needs. It’s difficult to estimate the cost of living for an undertermined length of time, in a yet-to-be-identified location, at an uncertain cost. But $100,000 (in 2025 dollars) per year for 3-4 years seems to be the starting point; memory care facilities may be much more costly. Mr. Blanchett blithely suggested in a recent interview that home equity is the solution to LTC costs–which is great for singles or for the first member of a couple to enter long-term care, but tough on the healthy spouse. I believe Morningstar’s safe withdrawal rate analysis excludes LTC costs too. In the past, care for the first partner was provided by the spouse. Often family members and Medicaid (which in the past was accepted by many decent facilities) cared for the second spouse. I think the policies of nicer assisted living facilities have changed & it is very difficult to find Medicaid beds now. Also, family members are likely to have jobs making it difficult for them to care for seniors in the family in their homes. All of these changes make it more important now IMO for seniors to plan for their own long-term care costs.
My risk reduction strategy for the teenage boy in my life (in my case, grandson) is “on our property, no fire and no water.” His nearby buddy has a beautiful backyard pool. When the weather gets chilly and/or I want a welcoming fire for my holiday gathering, YouTube on my moderate-sized flatscreen brings me a lovely crackling fire, and with music if I want it. Not everyone’s choice but my “humble” one. 😃
Thanks for raising this topic. I recently had a very general conversation with one of my sons about career plans, how much life & disability insurance he has, retirement savings, etc. Of course, I couldn’t delve into details (although I wanted to!), but I was pleased to hear he had some of your risk-assessment objectives under his belt.
Adam, thanks for an interesting article. During my career, my industry developed and adopted risk management processes for complex projects. I think the process is worthwhile – identifying risks, deciding how to approach them, and executing a risk management plan. I advocate for a balanced approach, recognizing that not all risk can be eliminated or identified, but implementing reasonable approaches. One of my mentors explained to me early in my career that the risks you watch aren’t usually the ones that get you – it’s the ones you don’t watch or don’;t know about. For that you need sound processes that improve the chance of success.
One approach I struggle to understand is folks who say that since we can’t predict or protect against every risk, there’s no point in doing anything. I believe we should do the best we can and then accept the results. I recall an intense risk management assessment of a deployment mechanism on a NASA satellite. The mechanism was simple in concept, but somewhat complex in implementation. We had done all the analysis, testing, and pre-launch inspections. There was some residual concern, but nothing really left to do. Our project manager declared we had initiated the HFTB phase – hope for the best. I remember invoking HFTB during my career when we had done our due diligence, but there was a bit of residual risk.
The mechanism worked perfectly, the satellite achieved its planned orbit, and worked almost flawlessly for 30 years.
Nice article. I know myself we spend less than we could, but we certainly are not deprived.
For the reasons in the article, I could not live in retirement without a steady guaranteed income stream. Trying anything else would stress me out every day.
As I mentioned in my recent Forum post, I have multiple investments as a backup even while we live on a pension and SS with excess.
To me designing or purchasing that solid, no worry, income stream is the key to a enjoyable retirement.
My greatest risk concern is hacking of our finances. I use 2 anti virus products to protect our computers and do 2 factor access on all sensitive accounts. Despite those precautions, I realize there is still a very real chance we could get hacked. Some of our personal identity information is now on the dark web thanks to lax corporations not protecting our info which increases the risk.
I also freeze our credit bureau accounts and use an IRS pin to further protect our assets. Despite all of this, I now realize that our greatest risk is probably the companies we do business with who are supposed to protect our personal identity info. It is only a question of time to when your personal info will be for sale of the dark web. Ignore these facts at your own peril.
Also, I agree, great articles by Adam G. Here is how I handle risk, use solid passwords and 2 factor access. Anti Virus products are almost useless, they only cover the latest hacks after the fact. Diligence is the best way to protect and have backup in case your computer gets hacked, yes that happed to me too.
First, I NEVER put all my eggs in one basket. I split our family Assets in both Vanguard and Fidelity, and same for bank accounts. The way I monitor our assets, is check daily via Quicken all bank accounts, and charge cards. Charge cards are probably the safest of all, as no liability if hacked, and that has happened several times. Vegas is a hot spot for credit card theft, it happened 2 years after my visit. No loss, but you have to report it, so the charge card people can investigate. You also have to check Vanguard and Fidelity at least once per month at statement time, but those companies are on it, as any change and you get an email.
Here is what is really difficult to monitor, what I call an inside job. And yes, that happened to me one time, but noticing that money was withdrawn, and reporting it quickly, solved the situation with no loss. Diligence, and daily checking, only takes one minute of my time a day, but I feel it catches all intrusions. Be safe out there in the jungle.
I had the same thought as David below: As I get older–and perhaps wiser–I see more risk in everyday life. Is that because my worry meter is larger or more sensitive, or rather that I perceive risk more accurately?
Love this one. Just two years into retirement, my biggest insight has been: We plan, God laughs.
By the time we reach these wiser years most have experienced our share of the world’s creative randomness. Spending less than we can seems a simple mitigation for ourselves. Or could it be driven by an estate planning goal, to die with less worry for others, by leaving something for them to cope more easily in a surprising world?