When Failure Happens Matters
Estrada’s study, which covers 21 countries over the 115-year period from 1900 through 2014, showed that two strategies with the same failure rates may have failed at very different points along the retirement horizon, with one supporting a retiree’s withdrawals for a longer period.
For example, Estrada shows that over the 86 30-year retirement periods he considered, a 4% withdrawal strategy from a global 60/40 portfolio would have failed 20 times, or in 23% of the periods.
However, those 20 failures looked very different. In some cases, the plan failed with only two years remaining; in others, it failed with 14 years remaining. Those are two very different outcomes, with very different consequences. Yet they both count the same way in informing the failure rate.
Because of the problem that Estrada describes in his research, the Monte Carlo software we use (Planning Center powered by inStream) at Buckingham Strategic Wealth and The BAM Alliance not only reports the success/failure rate, it also shows the median age at which the plan fails, and the median amount by which it fails.
Thus, investors can not only determine the estimated odds of failure, but they can understand in such cases how long into retirement their portfolio was able to maintain their desired lifestyle, and how long a period was remaining.
They can also determine how big an adjustment would have been required to prevent failure. This enables them to design effective Plan B’s—a contingency plan that lists the actions that would be taken if financial assets were to drop below a predetermined level. Those actions might include remaining in or returning to the workforce, reducing current spending, reducing the financial goal, selling a home and/or moving to a location with a lower cost of living.
Does your financial plan consider the issues Estrada raised? And do you have a well-thought-out Plan B? If not, I hope this serves as a call for action.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.