I recently read an article titled “Rethinking Risk in Retirement Planning” by Justin Fitzpatrick, published in October 2021, that really resonated with me. I wanted to share some of my key takeaways.
The author starts with the contention that while we can map out scenarios for retirement income with a very high probability of success—using software and confirming the underlying math and assumptions—the fear of uncertain outcomes often pushes us toward a more conservative path. For instance, a 95% probability that your current portfolio will provide $10,000 per month in retirement doesn’t mean there’s a 5% chance of running out of money. Rather, it means that if markets underperform historical averages for longer than expected, you might need to “settle” for less income—possibly $7,000 or $8,000 per month—for a period of time. If this is acceptable, we move forward with the plan. If not, we might adjust the plan to reduce the monthly average from $10,000 to $9,500, but improve the 5% “failure” scenario to $8,500.
The author’s point is about defining risk and failure more accurately. Certainty is very difficult, if not impossible, to achieve—and it comes at a cost. To me, flexibility in how we spend is fundamentally important in financial planning. As I often say, having variable expenses rather than fixed ones allows you to respond more easily to crises or short-term setbacks. Fitzpatrick notes that historically, any sound financial plan (where the initial income level includes a buffer to absorb risk) could have been adjusted through relatively minor changes, even in worst-case scenarios. Minor adjustments in portfolio allocation or spending can significantly impact long-term outcomes. Being willing to bend rather than break is crucial.
Finally, the article highlights that while how we invest is crucial, managing the ups and downs of markets and our financial situation might be almost as important. Handling these fluctuations involves understanding and managing risk, not avoiding it. Avoiding risk might mean missing potential returns or failing to keep up with inflation. Our role as your advisor is to help manage risk, and it’s our shared responsibility to maintain open communication to determine which risks to manage and how to achieve an outcome that works for you.
We aim to help you be good stewards of your money. Although this article focuses on rethinking risk in retirement planning, we continually think about—and rethink—risk and the possibility of success. Let’s ensure we’re defining success in a way that aligns with your goals.
You can read the full article here: Rethinking in Retirement Planning
