Big Problems with Probability of Success in Retirement Planning

when you retire the main question is how

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much can I

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spend financial advisers often approach

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this question by analyzing a wide range

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of ways life could go investment returns

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could be good or bad inflation could be

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high or low or any mix of these at any

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point in time in each scenario there is

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an amount someone could spend and still

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meet all of their goals including not

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running out of money and if I asked you

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what is the most likely amount that this

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person can spend you'd say it's right in

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the middle it's the spot where half the

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scenarios would support more spending

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and half would support less for decades

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we've talked about retirement spending

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using the probability of success score

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so what's the probability of success of

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this most likely spending level 50%

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obviously but wait 50% success sounds

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terrible we usually want that score to

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be much higher maybe 100 so where on

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this graph is

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100% right here in other words in every

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single scenario the retiree could have

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spent more and still hit their

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goals 100% success is really 100% chance

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of under spending what's going on here

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the problem is that the word success

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already means something it means living

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the best life you can using your

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resources well spending time with loved

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ones diving into interests and passion

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projects doing the best you can with the

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Life Health and time you're given but

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that's not what probability of success

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means instead it thinks success means

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spend as little as possible and leave a

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large portfolio balance when you die if

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we use probability of success it will

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drive people to underspend because we

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want that score to be high just try

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convincing anyone including yourself

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that 60% success is better than 90 it's

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impossible one reason it's impossible is

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that we all know that the opposite of

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success is failure take a 75%

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probability of success it doesn't take a

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mathematician to know that that means

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one in four people are failing that's

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completely

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unacceptable but of course it's also

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wrong it's an illusion that drives us

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not toward the goal of making the best

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use of our resources to live a

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fulfilling life but toward under

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spending and reg ret and leaving a lot

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of money behind for our executive to

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handle retirement planning is really

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about balancing the risks of

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overspending and under spending we just

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saw that probability of success is

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really risk of

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underspending imagine someone has a

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retirement plan with a 90% probability

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of success then there's a market crash

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you update their plan and their

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probability of success goes down at what

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point would you start getting nervous

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we often hear answers in the 70 to 75%

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range but if the risk of UND spending

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goes from 90 to 75 these clients are

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still living well within their means

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they have no business being worried

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about running out of money and we have

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no business making them think that they

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should be worried think about it if we

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use probability of success these clients

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will think that one in four people in

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their Position will run out of money

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that's scary but in fact they're still

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in the under spending zone so what do

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you think is it time for probability of

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success to go can we do better let me

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know in the comments