Navigating the Retirement Risk Zone

Today I'm going to explain

how retirement planning tools
are ruining American retirements.

Every year, I spend hundreds of hours
helping my clients interpret

financial plan data
so that they can get the most satisfaction

out of the wealth
that they have accumulated.

Online retirement planning tools
like RightCapital, NewRetirement,

or Empower play a major role
in most retirees retirement decisions

and will likely play
an increasingly important role

in American's retirement
planning efforts in the coming years.

Unfortunately,
there are some major pitfalls to be aware

of when using probability of success
or Monte-Carlo driven retirement

planning tools.

These pitfalls often lead to retirees
retiring far later than they

otherwise could.

As well as spending far
less of their wealth

than they appropriately could.

Now, at Peak Financial Planning,

it's my belief

and my mission that you have worked
hard to save so that you can not only have

a stable retirement,
but also a maximally enjoyable retirement.

So in today's podcast episode,
I'm going to be exploring the pros

and cons of probability of success
based retirement planning tools

and ultimately explaining the place
we believe they should hold in modern day

retirement planning.

So it's important to begin
by defining probability of success

based retirement planning tools.

So these are online financial calculators
that present spreadsheet data

in easy to digest visual reports.

Typically reports
that rely on a probability

of success metric or otherwise
known as a Monte-Carlo score.

This is usually a score between 1 and 100,
where a bunch of scenarios

are run on some input data
and what's given to the consumer,

or the user is a grid or a dial
that gives you a score between 0 and 100

that tells you the probability of
you're not running out of money

while still alive,

which means living till the end of life
and still having a pool of assets

to draw from.

And so that's what
a financial planning tool does.

The question now is
what is the purported purpose

of a probability of success
based financial planning tool.

The purpose is threefold.

The first is to create clarity
and allow more confidence in retirement.

You can think of this
as if you had a huge range of data,

and you needed to make a good decision
about how to retire and when,

and you were paralyzed
into being unable to do so.

Well, the Probability of Success
Retirement Planning Tool summarizes

that vast range of data
and gives you a nice, easy to read,

0 to 100 score that can
hopefully reduce some friction

and allow a more confident
retirement decision.

The second benefit of a retirement
planning tool, or a probability of success

based tool, is to put a better tool
in the hands of consumers.

For too long, consumers just like you
watching this video or listening to

this podcast have been gated
from great financial advice.

Either you had to do it on your own with
very complicated formulas or spreadsheets,

or maybe even some coding knowledge, or
it was very expensive in the form of

having to go through a very restrictive
financial advisors or financial planners.

And ideally, these Monte Carlo,
or probability of success

based tools are simple enough
to use effective enough,

but they put better tools
in the hands of the consumer.

Which leads to the third benefit,
which is that it empowers individuals

to do their own retirement planning
if they wish to.

So personally, I believe
these are all extremely admirable goals,

if they could be achieved responsibly.

And the core question I ask is
can these tools

provide more benefit than the risk
they might introduce?

And this is the type of question
we should ask of any tool.

Does it provide more benefit than the
possible risks that might be introduced?

One of the cases
I'm going to make in this video

is that I don't actually believe
they provide enough

benefit in excess of the risk,
because much of the risk is not disclosed.

And so the purpose of this podcast is
to explain or put disclaimers of the risks

that are inherent to using probability
of success retirement planning tools.

And then with those disclaimers in place,
people can use them responsibly

and make good decisions.

Using them the way they're intended.

Now, I'm going to start this video
with two of my own disclaimers

before I get into what I believe
are the pros and cons of these tools,

and what you should use
to supplement them.

The first disclaimer is that I personally
and in my practice use, appreciate

and respect Monte Carlo or probability
of success based financial planning tools.

In this podcast, I'm going to explain how
and why we fit those into our

into our process.

And I'm not saying any of you

watching or listening to this to wholesale
write off probability of success

based tools.

I'm simply trying to educate
so that we can restore a healthy respect

for a tool and a process
that, in my opinion, deserves more respect

and more caution than it is
currently receiving.

The second disclaimer I make
is that there will be obvious exceptions

to the claims
I'm going to make in this video.

A certain subset of people, in fact,

many of you listening
or watching may fall into this bucket.

We'll have the intuition

and the discipline
to build more detailed models,

to look beneath
the surface of these tools,

and may also have the combination of risk
tolerance, wisdom and experience

to properly use retirement planning tools
and obtain excellent outcomes.

My claim in this podcast is simply
that this is a small subset

and far from the majority of the retiring
population, and so I therefore see it

as part of my mission to help illustrate
and explain some of the underlying risks.

Now, my opinion,
unfortunately, what probability of success

financial planning tools
actually do is that, number one,

they mislead people with overly simplified

reports that we often trust and rely upon
without actually

knowing or exploring what is beneath
the surface of those reports.

For example, what does a Monte Carlo
or probability score of 75 mean?

What about 80?

Those numbers

tell us a directional idea of
how likely we are to not run out of money.

But they don't really tell us anything
about the underlying risk.

Where is the risk? Is it while I'm young?

Is it while I'm old?

Where will I spend more?
Where will I spend less?

We have to actually go in and dig
beneath the surface.

And while some people may do that,
they might have that intuition.

Many people will not.

They'll just take the summary
and accept it and change their real time,

real life behaviors based on that
probability of success score.

And that can be dangerous.

The second problem that these create

is that they create
lazy plans and lazy planners.

And I don't specifically talking
about DIY planners

like you watching this at home
or even financial planners.

I'm talking about everybody.

The problem is that

because the tool does the heavy lifting,
it does all the computations,

it automatically builds the spreadsheet,
it automatically does the formulas.

It takes that responsibility
away from us as planners,

both me as a professional planner.

But maybe you as a do it yourself for
who wants to do it themselves.

And we therefore become less competent
and less skilled as actual planners.

I can give you a couple easy examples.

Let's say that you're trying to make
a good decision about Social Security.

Why would you go and run
a Social Security spreadsheet

analysis of what the effect of
claiming at 70 versus 62 is?

If the tool just tells you
that the optimal option is to claim at 70.

Now what I know as someone who does
financial planning every day is

that there are vast differences

and why you might want to claim younger
and why you might want to claim later.

And those differences don't always reflect
in the probability of success outcome.

The problem is because the tool tells us
what to do, we don't always go

in and verify, and we atrophy our skills
at evaluating critically

some of these more nuanced
or textured decisions.

The third problem that I like to
illustrate, and this is one of my opinion,

is the most pernicious of the problems
that are caused by probability of success

retirement planning tools.

The third problem here is that these tools

convince consumers that they can
“become their own doctors.”

And so in real life,

there are many areas of our life
where we know that we should delegate

to specialists, a doctor
being the best obvious example.

Yes, I can go on WebMD.

I can type in symptoms that I'm having,
and I can try to diagnose my own

medical ailment.

The problem is, the risk and
the consequence of doing that are so high

that I know I should rely upon someone
who has many years of

schooling, education, mentorship,
experience, intuition, and wisdom.

That is all kind of created
through the process

of becoming that doctor,
to give me that medical diagnosis.

And there are many other careers
that we think of this in our lives,

such as being a CPA,
you know, a tax accountant, a lawyer.

And in my opinion,
the same thing holds true

for financial planners
or financial advisors.

Done properly,

these are really complex matters.

There's lots of nuance
and the risk and consequence are high.

And financial planning tools,
by making things too easy

and removing too much decision
making friction can oftentimes

mislead us into thinking
we can become our own doctor.

Now I'll give a couple illustrations
of where I see this

and where I believe this to be the case.

I'm going to illustrate this
through an analogy that most of

hopefully will communicate this well.

So the main problem
with a probability of success

retirement planning tool, but also
one of its benefits is that it does give

good, accurate directional information
about where you're headed

based on the data
you input into the tool today,

and whether you're likely to live
and not run out of money while alive.

That is generally accurate.

It's directionally accurate,
but the problem is,

it doesn't give you any of the details
about the step by steps to get there.

The prioritization.

What's the most important and impactful

of the action items
you need to do to get there?

It also doesn't give you
contingency plans,

the if then scenarios of what
do I do if this happens?

So then I do this.

And a common analogy that would make a lot
of sense in my opinion, is Google Maps.

Imagine if you used Google Maps as a tool
and you could put your destination

on the map, but Google Maps did not spit
back out the turn by turn directions,

the traffic or real time
road closure reports.

Or the third
which is the updating in real time,

updating and revised directions
if there is traffic or road closures.

Right? Those are the really valuable parts
of Google Maps.

Google maps isn't that valuable
if all it does is

tell you where the destination is, right?

And to illustrate this even further,
it doesn't really follow human behaviors

either, because most of us,
if we were to use Google Maps

and plug in the destination, but it didn't
give us any of that valuable data.

The turn by turn directions.

The real time tracking of your route,
and the updates and contingency plans.

You wouldn't use Google Maps,
so it wouldn't be all that valuable.

But that's just exactly what probability
of success retirement planning tools do.

They're really good
at illustrating the destination,

but they're not good at prioritizing
the step by step directions,

the real time tracking, or providing
clear contingency plans.

And as I said, this doesn't really follow
actual human behavior.

You wouldn't use Google Maps if it didn't
provide all those real time data.

And yet we use Probability of Success
retirement plans as though it does

provide that information,
when in fact it doesn't.

Now, the central case I'd make here
is that to compensate

for not having a clear understanding
of these contingency

plans of the action items,
you know, the turn by turn directions

and the real time tracking
what ends up happening for most people

is they use a probability
of success retirement

planning tool,
and then they end up delaying

retiring in pursuit
of a higher probability of success.

Oftentimes,
because we don't really understand what

that probability of success indicates.

So the central premise of this podcast,
What I believe makes retirement possible

is that having a clear understanding
and documentation of robust

contingency plans, turn by turn
directions, and real time tracking.

Many people would actually retire earlier
and spend more of their wealth

because they would be reassured

by the possibility
of doing all that successfully,

because they would have tools
in their toolbox

rather than just having a destination,
which is really just a wish and a dream.

Right?

So we actually have practical
real time tools rather than just

kind of having a direction to travel.

Most people either delay retirement
and waste years that they can't get back

or spend less in retirement,
and lose out on the satisfaction

and joy that the wealth you've accumulated
should provide you, when in actuality

they can have both stability
and satisfaction if they had the right

turn by turn directions, real time
monitoring, and contingency

plans in place.

And so how do we at Peak
Financial Planning

incorporate probability of success tools
into our retirement planning efforts?

The first way we do that
is they're great for use as a baseline.

It's really excellent

to plug in the information
and have it score between 0 and 100.

That tells you the likelihood

that you will live to the end of your life
and not run out of money.

Super, super useful as a baseline.

But beyond that, we need
supplementing tools that actually provide

not just the destination,
but the actual turn by turn directions.

And so at our practice,
we use four other tools.

The first of those other tools

is we use a dynamic spending tool,
something like Income Labs.

Income labs is a dynamic spending tool
that ties your spending year

by year to the variability
of your portfolio value.

What that means is

it gives you very simple to follow rules
that say you can slash

should spend this amount of money
as long as your portfolio is valued

between X dollars and Y dollars.

When the portfolio goes above Y dollars,
you can increase your spending

by this amount.

When your portfolio goes below X dollars,
you should decrease your spending

by this amount.

It's effective because it actually
takes into account real time

portfolio values and gives
you real contingency plans based on that.

The second critical tool
I believe, that we should use

to supplement probability
of success retirement plans

are spreadsheets,
like a distribution rate table.

Now distribution
rate table is where you export the dollars

that you would expect
to spend each year in retirement.

You compare that to your start of the year
portfolio value and it spits you out

a distribution rate, which is the percent
of total retirement assets

you would be spending or distribute
distributing each year.

And then what
you could do with that distribution rate

table is evaluate where in your retirement
are the distribution rates the highest

and therefore where will your distribution
rate risk be highest.

And then how can you compensate
and adjust for that?

I have several videos on my
YouTube channel that show this visually.

So if you're listening to this by audio

or even watching this on YouTube,
there's no visual aids for this here.

You can go look at any of the case
study videos I've done on my YouTube

channel to see me demonstrate
what I call a distribution rate table.

Now there's a third tool,
and the third tool is very simple.

This is to use real time
spending tracking tools,

like EveryDollar or QuickBooks
to track your spending.

Retirement is all about spending.

And the probability of success tools
do not monitor real time spending.

They don't implement that data
in real time.

And so those probability of success is
are really just snapshots.

They're just a point in time
percentage based read.

But they don't incorporate your real life
data and your spending in retirement

or using a spending tool in retirement
is like tracking your blood pressure,

your heart rate,

and your weight like it's like tracking
the most vital of your health measures.

The fourth and final tool we recommend
using is some kind of better risk

and reward measures
for retirement investment portfolios.

So, instead of using only asset allocation
and rate of return as primary measures

of retirement
portfolio construction and success,

we highly recommend using things
like standard deviation,

beta,

market correlation,

and maximum drawdown,
just to mention a few,

because the more measures you have,
the better your data will be,

and these will support the actions
and decisions

you should make with your portfolio once
your retirement plan is built.

And it's just another way to produce
contingency plans for your portfolio.

So I like to wrap this podcast up
by asking you to ask yourself

a very important question.

If you use or have used a Probability
of Success retirement planning tool

and you have a higher probability
of success, let's say above 70%

and you’re age 62 or older,
why have you not retired?

What are you waiting for?

Are you waiting for a specific percent or
number on the probability of success dial?

Are you waiting for a specific
dollar amount in savings?

Is there something that those future goals
you know, your future

probability of success, or your larger
dollar amount and savings will mean to you

if you actually achieve them?

I'd like you to consider
whether a higher probability

of success or more money,
or actually what you're looking for,

or if what you're looking for
are turn by turn directions,

real time tracking, and contingency plans
that allow you to retire earlier if you'd like to,

spend more money in
retirement if you'd like to

and know that you're doing it responsibly

because you have monitoring
and backup plans in place.

I'll add links in the show notes below

in the description
to this video on YouTube,

but also in the show notes to the podcast,
to respective videos that I've done on

YouTube that show visual aids detailing the
four tools that I've just recommended using

in conjunction with the probability
of success retirement planning tools.

So make sure to check out the notes
if you're interested.

Anyhow, hopefully this
video or podcast helped

illustrate the pros and cons of modern
retirement planning tools.

And as a call to action to you,
I'd encourage you

if you'd like to retire earlier or spend
more in retirement and do so confidently,

I highly encourage you to explore
supplementing your probability

of success based retirement planning tool
with some additional tools.

Thanks for your time and attention.

If you liked what you heard
in this podcast or in this video,

you can see more
about how we help our clients

retire confidently and synthesize
this information on our website at

www.thepeakfp.com

And you can watch the supplemental
videos I mentioned on our

YouTube channel at
ThePeakFP on YouTube.

Thanks for your time and attention.