‘Success,’ More or Less?

 What does it mean to have a 75% probability of success?

I’ve never been particularly fond of the probability-of-success measures commonly used in retirement planning. It’s not that the calculations aren’t useful — or that I have a better crystal ball. I’m just not convinced that most people understand what the resulting percentage means, much less how to apply it to their retirement decisions.

After all, a 75% probability of success sounds like a grade — and not a particularly good one. It also sounds as though there is a 25% chance that your retirement will be a complete and unmitigated failure. Neither interpretation is necessarily accurate.

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A new paper from David Blanchett at PGIM, aptly titled “Successfully Failing,” takes on that conventional measure and suggests that it may not simply be confusing. It may actually lead retirees — and those advising them — to make less-than-optimal decisions.

Success ‘Measures’

Probability-of-success calculations generally run a retirement strategy through hundreds or thousands of different scenarios. If the retiree’s assets last through the prescribed retirement period, the scenario is labeled a success. If the money runs out before the end, it is deemed a failure. 

It’s all — or nothing.

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A scenario that comes up $1 short is a failure. So is one that comes up $100,000 short. A portfolio exhausted in the final month of a 30-year retirement receives the same failing grade as one depleted after 15 years.

For that matter, the success side can be just as uninformative. A plan that finishes the period with $1 remaining is successful. So is one that leaves the retiree with $1 million —though those outcomes may say very different things about how much the retiree could have enjoyed spending along the way.

In effect, probability of success answers one narrowly defined question: In how many of our modeled scenarios did the portfolio avoid hitting zero before a date we selected? That may be useful information for academics or retirement planners, but it doesn’t strike me as the question actual people are trying to answer.

Goal ‘Oriented?’

Blanchett suggests an alternative: goal completion percentage. Rather than sorting every outcome into one of two buckets — success or failure — it measures how much of the desired spending was actually funded.

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Consider the paper’s simple example: a retiree wants to generate $100 annually for 10 years. Across 10 modeled scenarios, only half provide the entire $1,000. That produces a probability of success of just 50% — a number likely to send most retirees scrambling for the nearest spending cut. And yet, averaged across those same scenarios, 96% of the desired spending is funded.

Same assumptions. Same outcomes. Very different — and arguably much more useful —description of the result.

Most people can probably get their arms around being able to fund 96% of what they hope to spend. They can consider what comprises the other 4%, whether they are willing to do without it and what adjustments might close the gap. That seems more tangible than being told that their retirement plan has a 50% chance of “failure.”

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It also acknowledges something these models frequently overlook: retirees (not to mention non-retirees) don’t generally set a spending plan on the day they retire and then blindly follow it for the next 30 years. They adjust. They postpone a trip, replace a car later than anticipated, reduce gifts or make other changes as their circumstances evolve. A disappointing market doesn’t automatically cause them to spend their portfolio down to zero without noticing.

Indeed, Blanchett estimates that viewing the same risks through goal completion rather than a traditional probability-of-success threshold could allow some retirees to spend 20% more without taking on additional risk. That is potentially a significant improvement in retirement — not because the investments performed better, but because the measurement did. Not to mention the understanding of what the measurement means.

Successfully ‘Failing?’

That said, goal completion percentage isn’t a perfect measure. Knowing that a plan funds 90% of projected spending still doesn’t tell us when the shortfall occurs — or what kind of spending will have to be sacrificed. Funding 90% of a budget containing substantial discretionary travel is different from funding 90% of one already pared down to food, shelter and healthcare.

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Still, it gives retirees something that probability of success generally doesn’t: a sense of the size of the potential problem. And that creates an opportunity to make informed choices rather than merely reacting to the absolutism of a passing or failing grade.

After all, a retirement that delivers 96% of what you hoped for may technically have “failed” by some measures.

But a measurement that can’t help folks distinguish that kind of outcome from financial catastrophe surely has.

• Nevin E. Adams, JD

 

‘Watch’ Words

The retirement industry spends enormous time modeling outcomes, but most of what really prepares us for retirement isn’t found in a Monte Carlo simulation. It’s learned from watching people around us live their lives. Often our fathers.

My parents led mostly through example — and powerful as that can be, as a kid those messages are often too subtle to be noticed, much less appreciated.

At 6’ 5” he was an imposing figure, all the more from the pulpit from which he did speak. He was a good speaker, but not a natural one. As a minister, he worked hard at it, studied his subject matter, and practiced his presentation relentlessly, each and every week. I always thought it amazing that such a quiet, introverted man would choose that career — but, and though it can’t have been easy, it was something he felt called to do at an early age.

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He had opinions, but didn’t impose them on others. It was difficult (and sometimes frustrating) to wrest opinions from him. Indeed, despite his ministry, at home my dad was a man of few words — spoken words, anyway.

Significantly, he walked his “talk” — his faith, his love and respect for all people, even those with whom he disagreed — and those were attributes in short supply, even then. But this quiet “giant” found his true gift in writing — and in the process extended his influence and ministry well beyond a single congregation.

For all that fine example, I didn’t learn anything about finance from my dad — he avoided big purchases with the fervor of Ebenezer Scrooge, though he’d spend that much (and more) on small things (mostly books, much to my mother’s chagrin). His retirement decision was driven almost exclusively by age — honestly, I think he was going to stop working at 65 even if the finances didn’t support that timing (fortunately, they did).

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His life example(s) notwithstanding, I’m a different person than my dad, though his example is never very far from my thoughts. As a parent, I’ve tried to share with my kids the lessons I’ve learned (and continue to learn), tried to spare them the pain that came with many of those (some I still can’t bear to admit aloud), but I’ve also tried to give them the room they need — and deserve — to learn their own on the life path(s) they chose — though that’s a life lesson of its own, and one with which I still sometimes struggle.

Sometimes we follow in our parents’ footsteps — and sometimes we go a different way. But here’s hoping that the footprints we leave along the way — intentional or otherwise — make other’s lives…better.

Happy Father’s Day!

• Nevin E. Adams, JD

Are Your Retirement Savings Behaviors Naughty — or Nice?

  We’re often told that actions — or lack thereof — have consequences. Indeed, this is the time of year where many a stressed-out parent often falls back on the admonition from that holiday classic “Santa Claus is Coming to Town” — you know, “you better watch out, you better not cry…” because Santa is keeping tabs.   

In fact, as Christmas approached, it was not uncommon for my wife and I to caution our occasionally misbehaving brood that they had best be attentive to how their actions might be viewed by the big guy at the North Pole.

That said, a few years back — when my kids were still “kids” (and “believers”) — we stumbled across an ingenious website; one that did more than caution. It actually purported to offer a real-time assessment of one’s "naughty or nice" status. Our parental admonitions notwithstanding, nothing we ever said or did had the impact of that website — if not on their behaviors (they were kids, after all), then certainly on their level of concern about the consequences.

In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been PARTICULARLY naughty that year) was on the verge of tears, distraught that he'd find nothing under the Christmas tree that year but the lump of coal and bundle of switches he surely “deserved.” 

‘Naughty’ Savers?

Arguably, there are plenty of websites available to workers to check on their status as “naughty” or “nice” retirement savers. Despite that availability, surveys consistently indicate that they are, for the very most part, disinclined to do so[i] — perhaps because they, like my son once upon a time, feared the answer.

Nor is there much sign that those fears ever translate into improved behaviors. Indeed, it often seems that, their bad savings behaviors throughout the year(s) notwithstanding, some think they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit, or perhaps pull off some kind of compounding “magic” with some last-minute savings scramble.

Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, even though, like my son, a growing number evidence some concern about the consequences of their "naughty" behaviors. Also, like my son, they tend to worry about it too late to influence the outcome.

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Of course, the volume of presents under our Christmas tree never really had anything to do with our kids' behavior. As parents, we nurtured their belief in Santa as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we actually expected it to modify their behavior (though we may have hoped, from time to time), but rather because we thought that children should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize — or should — that those possibilities are frequently bounded in by the reality of our behaviors. And though this is a season of giving, of coming together, of sharing with others — it is also a time of year when we should all be making our list(s) and checking them twice — taking note, and making changes to what is naughty and nice about our behaviors, savings and otherwise.

Yes, Virginia, there is a Santa Claus — but he looks a lot like you, assisted by "helpers" like the employer match, your financial adviser, the investment markets, and tax incentives to save.

It’s time to do more than just make a list — but it’s a place to start. And there’s no time like the present.

Happy Holidays!

• Nevin E. Adams, JD

P.S., Incredibly, the Naughty or Nice site is STILL online (at http://www.claus.com/naughtyornice/index.php.htm) — so check it out — cause you just never know…

 

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[i] Which should, of course, cast skepticism about the accuracy of their guesses as to what their retirement needs are, much less their current level of savings.

Things That Make Me ‘Mad as Hell’

  So, what kinds of things get your blood “boiling?”

Some of you will recall that back in 1976 there was a movie called “Network” with a big cast that got nominated for a bunch of academy awards including best picture and director (didn’t win), as well as best actress and actor (won both, as well as best supporting actress and several others). The underlying premise of the movie was one of corporate greed, more specifically the extremes to which TV networks would go to garner ratings. The most extreme was allowing an aging network anchor named Howard Beale to remain on camera after he said he was going to blow his brains out on national TV.

Well, he didn’t — but he did wind up being positioned as a kind of “mad prophet” ranting about the ills of society, leading up to an evening where he encouraged similarly frustrated viewers to go to their respective windows and shout “I’m mad as hell, and I’m not going to take it anymore!” While that frustrated call to action likely didn’t actually change anything — it apparently was good for ratings.

While we still have TV ratings (though I’m amazed at the mere slivers of population that these days constitute “winners” in the various time slots), these days it’s all about clicks, views, forwards, and impressions. 

And it was with that in mind last week I shared with those in attendance at the Leafhouse National Retirement Symposium (LNRS) a list of things that made me “mad as hell” — things that those in our industry generate, promote and often share as fact without any application of common sense, and no apparent appreciation for the damage done by their complicity in sharing such nonsense. 

Here's my list — of things that make ME “mad as hell” — in hopes that you’ll agree.

1. Reports that label as “abandoned,” unclaimed or “forgotten” account balances that have simply been “left behind.” See Talking Points: Third Time No Charm in ‘Forgotten Account’ Fantasy.

Seriously — does ANYBODY think that 20% of the total balances in the 401(k) universe is “forgotten?” And yet there were any number of retirement industry folks (and trade publications) that faithfully picked up and shared this third bi-annual report from Capitalize, which every year gets even bigger and more exaggerated (the “black magic” of compounding). 

Sure, there are SOME in that category — but TRILLIONS? This report is nonsense — and shame on you if you gave it legitimacy by passing it along with anything other than jaw-dropping incredulity. 

2. People who think “good faith compliance” with the law could include completely ignoring the law. See Talking Points: Braking ‘Breaking’ News.

Last month, the IRS surprised us all with the release of final regulations regarding the Roth “cap” on catch-up contributions. And then the rumors started. 

Let’s face it — the regulations were a LOOOONG time coming. So long in coming that there were some who were thinking (a) they weren’t coming at all, or (b) the IRS would simply push back the enforcement date (as they had previously). To their credit, most of the industry publications acknowledged the complexity of the read and indicated there would be more to follow. 

But then some misread the effective date of the final regulations (01/01/2027) as applying to the date on which the Roth cap on higher-income individuals would be applied — which had been set as 1/1/2026 in the preliminary regulations issued in January — and which the final regulations stated was NOT impacted by the final regulations. 

Worse — they somehow saw the IRS’ lenience in allowing for “good faith compliance” with the (admittedly) late issuance of the final regulations as allowing them to just ignore the 2026 date. And then there were the folks who, in their hurry to share that news, got on social media to do just that.

Folks — if you don’t KNOW the answer, don’t make matters worse (not to mention your credibility) by sharing it. 

3. Pretending like everybody used to have a defined benefit plan. See A Penchant for Pensions?

This one’s a “golden oldie” — a “myth” that keeps coming up. Indeed, in a recent Fortune article, Teresa Ghilarducci tried to explain away the lack of an apparent retirement crisis by claiming that older Boomers all had pensions.

The truth is that, at its peak, only 38% of workers in the private sector were ever covered by a pension. And “covered by” only means they worked for an employer that offered a pension. Only about 12% ever got a full pension from the plans they were covered by. You want to talk about a retirement crisis? Think about the one we’d have if we were relying on defined benefit plans.

4. Adding up 20 years’ worth of potential expense and presenting it as a lump-sum retirement savings target. See: Talking Points: A Health Care ‘Scare’

Are you ready to spend $86,000 on cable TV in retirement?

I know, crazy, right? And yet that’s the kind of math being used to get people’s attention about retirement these days. The most recent — an annual study by Fidelity that now estimates that a 65-year-old retiring in 2025 can expect to spend an average of $172,500 on health care and medical expenses throughout retirement. There are some lengthy caveats footnoted on that projection, but suffice it to say that the number is — and is certainly intended to be — an attention-grabber. 

And, let’s face it, a headline that said you’re going to need to spend $8,625 per year in retirement on health care (1/20 of $172,500) really doesn’t have the same impact — particularly if you are paying attention to what you are spending on health care prior to retirement, which may well be less than that.

In which case the headline might actually be something like “you might not have to spend as much in health care after retirement as you do now.”   

But where’s the panic button for THAT? 

5. Surveys that ask people who have never done a retirement-needs estimate to estimate the “magic number” they’ll need to save for retirement. See No 'Magic' in These 401(k) Retirement Numbers

Another annual report that makes my blood boil is one that purports to share a “magic” number for retirement, based on what survey respondents said they thought they’d need. As though they’d know.

It always garners a lot of coverage — generally climbs higher from the previous iteration — and is always positioned next to numbers from completely different people as to what they actually have accumulated, and always about half the magic number. 

There are many problems with reports like this — none of which the breathless reporting of the conclusions acknowledged:

(1) It’s an average — while we get some breakdown on age brackets, we know nothing about their incomes, where they live, their health, etc. What someone needs (or thinks they need) living in New York City is (or should be) considerably different from the projections of someone living in Dubuque, Iowa.   

(2) It’s based on what people “think” (who have probably not given this any real thought).

(3) It’s surveying completely different groups of people a year apart, so drawing a trendline is a predictable, but dubious reality.

Let’s face it, stories like this serve mostly to fuel the concerns that responsible human beings already have as they try to look ahead to future decades in a time of tremendous uncertainty.

If they weren’t nervous before they saw these headlines, they surely are afterwards. 

Next week: The rest of the list — and what you can do about it/them.

• Nevin E. Adams, JD

‘Scare’ Tactics

 Could someone please explain to me why the retirement industry keeps publishing ridiculous, uninformed and often ludicrous notions of retirement income needs?

Honestly, I have no earthly idea what value any rational thinking person would attach to the guesses that an uninformed public makes about retirement income needs. But then why any credible source would take those guesses and then AVERAGE them (cause you know how much more accurate an average is[i]) for publication is — well, it’s the kind of thing that makes my head hurt (particularly after repeated banging of my head on a table after reading another).

The latest I stumbled across came from BlackRock, which — based on a survey of “1,000 national registered voters in the United States” — declared that $2.191 million is the “average expected amount of savings needed for retirement.”

Seriously?

No wonder among that same group just 22% were deemed to be “extremely or very confident they will have enough money to live on throughout their retirement years.” I’m surprised it was that high.

Speaking of high, take just a second and apply the 4% drawdown “rule” to that wild-eyed estimate, and you’d find that produces $87,640 in annual income — on top of Social Security! Think people could muddle by on THAT?

Sadly, the sponsors of this survey have the ability to shrug, and say “well, that’s what people think.” But shouldn’t knowledgeable people in this industry have a responsibility to call “BS” on that kind of crazy assumption? 

Unfortunately, there’s not even a footnote here to suggest anything other than the perceived need is real — juxtaposed, I should add by the numbers this same (likely equally misinformed) group puts forth as the amount of savings they have.    

Look, BlackRock is not the only — and probably not the last — to put forth this kind of nonsense. Northwestern Mutual did so last April — even having the temerity to label it a “magic” number (though they “only” said it was $1.46 million). This being an annual “event” of theirs, I’m sure an “update” is forthcoming. More’s the pity. 

One assumes that the purveyors of these data points see it as a “wake up” call to folks, a motivation. But I think this “scare tactic” — there’s really no other word for it — is more likely just another sign to regular folks that they’ll NEVER manage to reach it — and surely some, perhaps most, just give up, or don’t even try in the first place. Not to mention the encouragement it doubtless provides to those who want to proclaim the system is “broken.”

What people think they’ll need is one thing — but I would argue that we have a responsibility to help them understand what they really need. 

And it’s not exaggerated, uninformed “scare tactic” guesses.

• Nevin E. Adams, JD

 

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[i] Averages are easy math — but misleading. In this case that average tells us nothing about the relative breakdown on age brackets, incomes, where they live, their health, etc.  What someone needs (or thinks they need) living in New York City is (or should be) considerably different from the projections of someone living in Dubuque, Iowa.   

A Need to 'Know' Basics

Back in the middle of the pandemic, my then 91-year-old mother was presented with two options—one a specialist recommended, the other favored by her trusted general practice physician. And of course, it was to be…her decision.

This kind of thing happens all the time in the medical field where such things often seem as much art as science, with a myriad of factors to consider, not the least of which is the skill and experience of the medical professionals putting forth their recommendations. Not that it’s limited to life-and-death decisions. Indeed, it’s the kind of decision with which we’re often presented; when that annual auto inspection detects a hitherto undetected major repair need, when that leaky toilet repair uncovers some long-standing, but unobserved water damage, when that last minute call to fix a water heater or air conditioner reveals that it might—but might not—last the season. Those things routinely involve experts of one sort or another turning to us relative (or complete) amateurs, presenting us with complicated choices that often involve a complex weighing of factors we may not even understand. And yet we do.

Or, if you’re a 401(k) participant these days, we just do it for you. 

But don’t retirement plan participants need to have some idea about what’s going on with their retirement savings? In a “do-it-for-you” default enrollment/investment paradigm, aren’t we basically creating a generation that simply trusts and accepts the decisions of their “betters”—who, to be honest, aren’t always deserving of that trust. Said another way, where’s the “check engine” light for your 401(k) account?

That brings me to the continued focus of the need for “financial literacy.” Long touted as something of a panacea for the apparent shortcomings of our education system when it comes to practical financial applications, I remain skeptical.[i] Not that it wouldn’t be nice to have participants who had a basic appreciation for the markets, the impact of fees, the balance between equity and fixed income, and perhaps even a fundamental understanding of what a mutual fund is. But I think financial “literacy”—though its definition is surely fluid—is perhaps a higher bar than needed for most.

I still think effective financial education begins early, and at home. Not about the markets, perhaps—but the basics of a budget, the discipline of an allowance—better still, one anchored on household obligations.[ii]    

That said, a recent acquaintance has suggested what I think is an outstanding idea—and perhaps a way to not only expand the knowledge of the current generation of savers, but to build for the future; take that financial literacy training you may already be doing for your 401(k) clients—and expand it (in a separate session) to include…their kids!

Odds are you’ll not only provide valuable insights to that next generation of savers—but I wouldn’t be at all surprised if you find that help fulfill their “need” to know as well!

What do you think? 

- Nevin E. Adams, JD

 

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[i] See The Problem(s) with Financial ‘Literacy’.

[ii] Don’t get me wrong—IMO kids should also have things they do around the house to help as members of the family.