|
The standard retirement calculator gives you a simple output and a false sense of certainty. The reality, hidden inside that 7% CAGR assumption, is a wide distribution of outcomes that can span millions of dollars. How timing luck can shape your retirement balance regardless of how well you saved.  Meet two retirees. We’ll name them Linda and Mark.
Linda retired at the end of 2008. Mark retired at the end of 1999. Both worked for 40 years. Both contributed the same amount to their 401(k)s. Both invested in a basic S&P 500 index fund. Neither panic-sold during crashes nor tried to time the market. They simply just invested their savings in their retirement accounts for the entire span of their careers. Linda finished with roughly $1.52M in today's dollars. Mark finished with roughly $4.97M. Same strategy, same discipline, same 40-year horizon, and a $3.45M gap between them. The only variable difference was the years they started and ended their careers. Now, go open any standard retirement calculator. Plug in their identical inputs: same contributions, same 40-year horizon, same 7% average assumed return. The calculator will spit out one number for both investors. It has no way of telling you that there is a wide range of outcomes somewhere between $1.52M and $4.97M, and that where you land inside that range is drastically attributable to the whims of the stock market. It's a structural problem with how retirement planning is oversimplified in its presentation. It only gets worse when you layer on what the behavioral research says about how people like Linda and Mark actually behave during their careers.
0 Comments
The fear of running out of money often results in an overly conservative retirement plan. The flat-line spending model doesn't properly reflect the math behind a typical retirement spending glide path. Here's what the research suggests we do instead.  Open up almost any retirement planning tool, run a projection, and 99% of the time you’ll see a flat withdrawal rate (usually 4%) from 65 to 90, adjusted for inflation. It’s predictable and tidy.
It's also entirely oversimplified. The problem with the flat withdrawal rate is that it implies you, at 65, will have the same spending behavior as you at 85. Do you think you’ll have the same appetite for life, same desire to travel, same interest in a new car, same urge to go out for a drink at these vastly different ages? Probably not, right? Aging is dynamic. Every stage of life looks very different at its beginning versus its end. When your financial plan is built on a flat line, the math often tells you there's a crisis looming at 90 that demands significant restraint today. The result is a scarcity mindset that isn't entirely reflective of your evolving financial wants and needs.
Research from Stanford Medicine reveals that aging happens in sudden shifts — not gradual decline. Here is a roadmap for deciding when your money should be used when factoring in good health.
When Your Body Peaks vs When Your Money Peaks
I’ve sat across from a lot of people who spent their financial lives doing everything right. They contributed significantly to their 401(k). They stayed the course through volatile markets. They deferred and saved and planned.
Then, they retired at 65 and watched their nest egg continue to grow; the habit of not spending had calcified into the default mode of their lives. What most current and prospective retirees don’t know, and what many financial plans don’t factor in, is that there’s a risk in financial planning that doesn’t show up in projections or Monte Carlo simulations: Capability Risk, or the risk that your wealth arrives after your ability to fully use it. Money compounds, but your ability to enjoy it doesn’t.  There is roughly a 50% chance that at least one partner in a married couple will live into their 90s.¹ And the 90+ population is projected to grow rapidly as medical advancements continue to push life expectancy further into the 21st century.
Simply put, we are living longer than ever, yet we continue to invest as if life ends at 65. From the autopilot glidepaths of Target Date Funds that begin cutting growth decades too early, to retirees who stay "defensive" five years into a thirty-year retirement, the typical investor has traded the temporary discomfort of market volatility for the permanent risk of outliving their money. While a number of factors contribute to seniors’ affection for low-risk assets (the 24-hour news cycle, structural pessimism², etc.), the advice industry itself has normalized excessive conservatism as the default. My view is more straightforward: unless you are in the Retirement Risk Window (the critical five-year window immediately surrounding your work exit date), over-allocation to safety has likely harmed long-term outcomes more than it has protected them.  I recently watched Jay Kelly on Netflix, where George Clooney plays a fictional movie star who dedicates his life to his craft and succeeds by every external measure. The catch? He later admits to choosing his career over his family, only to realize he’s missed many of life’s most meaningful moments and relationships.
I don’t generally sit down to watch a movie looking for financial metaphors, that would be weird. But every so often, a story brushes up against a question I already spend time thinking about. In this case, Jay Kelly’s story happened to remind me of the FIRE movement. Whether it’s Coast, Lean, or Fat FIRE, the core philosophy is the same: front-load sacrifice in your early years to buy freedom later. The math is sound. Saving aggressively from an early age is essentially the equivalent of a financial superpower. The appeal is also undeniable. Who doesn’t want the freedom to do whatever they want in their 40s? I’ve always joked that my dream job is retirement, and FIRE is a good mechanism for getting me there. But the FIRE movement raises a complicated set of questions. What are the movement’s disciples missing by deferring their lives in their 20s and 30s? And how do we find the "goldilocks" zone between saving responsibly for the future and actually living along the way?  Did you know that the most popular finishing time for marathon runners is 3:58?¹ A while back, I read about common marathon themes in Adam Alter’s Irresistible and came across a fascinating detail: finish times aren’t distributed smoothly across the clock. Instead, runners cluster at round numbers (3:30, 4:00, 4:30).
The evidence points to a meaningful takeaway: people will sprint to cross a finish line before a psychological threshold. Cross at 3:59 and you’re triumphant; cross at 4:01 and it feels like you fell short. This isn’t unique to running a marathon. Psychologists call this the goal-gradient effect: as we approach a target, our motivation increases sharply.² Runners sprint the last mile. Sandwich shop customers order more often when their punch card is nearly full. Investors save harder when they’re closing in on a milestone.³ |
RSS Feed