4 Replies Latest reply on May 10, 2014 2:35 PM by BoBraxton

    Dealing with Uncertainty

    tozenne

      I've not seen it yet on TIAA-CREF, but some investment houses will run some sort of Monte Carlo simulation on your portfolio; in the end, they try to tell you what the odds your retirement nest egg will be sufficient to the end of life. 

       

      The idea seems to be that you can fiddle with your planned spending, portfolio allocation, etc. until you are happy with the simulation results.  But it isn't clear what a "good" outcome would be.  For example, one simulation says there is just a 3% chance I'll exhaust my assets before I die. Is that high?  Low? About right?  Should I be more "aggressive" and allow for a higher "bust" chance, so I can spend more or have a better chance of dying rich?  If 3% is too low, is 30% too high?  How does one pick a risk tolerance?

       

      Of course, this is simulation on just one dimension: what might happen to returns over the next several years.  We know they aren't fixed, so seeing what might happen makes sense.  But lifetime, health status, taxes, and more are also likely to kick us in the butt (or give us a pleasant surprise) and none of these are reflected in the simulation outcome. 

       

      Dealing with uncertainty of investment returns is a good first step, but does anyone have thoughts about how to think about investment uncertainty in light of all the other uncertainties that lie before us? ,

        • Re: Dealing with Uncertainty
          MyR Community Manager

          tozenne, thank you for creating a new discussion thread! We appreciate and enjoy your participation in the MyRetirement online community and look forward to your future contributions.

          • Re: Dealing with Uncertainty
            BoBraxton

            Investment uncertainty looks a little less uncertain to me over a time horizon of another two to three decades (and more?). I call mine / ours "monkey investing" (set and let - automatic). I watch it but do not fret. This is possible largely because our "fixed" incomes are at least adequate to our retirement lifestyle (beginning 2011 October third Wednesday direct deposits).

            • Re: Dealing with Uncertainty
              jkom51

              A 3% chance of running out of funds on estimated life expectancy is very low. However, there are any number of "gotcha's" to consider. For one, what is YOUR life expectancy - is it higher than average, or lower? Most people aren't very good at knowing how to calculate that, although there are web calculators that can guess (Living to 100 is one of them). What is your spouse's?

               

              For another, what is an acceptable risk to you and your spouse (you may both have different comfort levels with risk-taking)? Do you want to spend more, and accept a higher risk of running out of funds? What is a comfortable level of income to you, in retirement? Do you want to travel, which costs a lot, before infirmities hobble you? Or are you content to stay home and occasionally play a little bingo or take walks, preferring cheap/free entertainment?

               

              Your confusion illustrates the shortcomings of looking just at investing profits. Your financial picture has to be holistic: what are your goals? Does your spouse agree 100% or are you holding two different visions for the future? What are the risks of disability or critical illness impacting your lifestyle? How do you mitigate those risks? Is it possible and affordable, at this point? Will family be a positive impact or a negative financial drain in the future? If you lose one person's income (pension and/or SocSec), what happens? Are your legal papers in order? Do you know how much home healthcare aides and senior care facilities cost in your area? What happens if inflation picks up to the statistical long-term average of 3.5% - can your finances handle the fact that in 25 yrs your money is worth 50% of its value today?

               

              The questions are many, and exploring various scenarios means facing the negatives that life can bring. Some you can manage, some will be impossible to mitigate. But it's the very act of planning that has the inherent value -- once you have thoroughly examined what could happen vs what might happen, there is a peace of mind in knowing that you have prepared yourself as best you could. The biggest mistakes are made in emotional circumstances when the person is unprepared. I firmly believe that forewarned is forearmed.

               

              Good luck to you.