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Since I have been implicitly arguing that a goals/assets approach to financial planning is imprudent, I thought I'd give this another try, more systematically.

The main idea is to realize that all projections about life expectancy, inflation and taxes, asset returns, etc, are merely guesses about numbers and events that cannot be known. Such things can be guessed at, but those guesses depend on assumptions that cannot be tested in any meaningful sense. Models can be constructed, but a prudent person would never bet their life on them. Instead, worst cases scenarios need to be envisioned and then defended against, and even that approach will fail in a significant number of cases, because the as-yet-unknown cannot be defended against.

Consider a simple example of one number that has to be known with a fair amount of exactness in order to plan retirement: one's life expectancy. The current maximum life expectancy is about 122 years. Few people will attain that age. But are you willing to risk your running out of money before you run out of life? If your retirement strategy is to accumulate assets during your working years and then to draw them down during your retirement years, what might be a prudent drawdown rate?

If you can guarantee that your expenses will be such and such, your inflation and taxes will be such and such, and the return on your investments will be such and such, then, of course, you can project a prudent drawdown rate. You've written an equation with one unknown, and simple algebra allows you to solve for that unknown. The planning reality, however, is that the retirement equation has an unknown number of variables, each of which has an unknown range of parameters.

There is no doubt that guesses can be made about what those relevant variables might, in fact, prove to be, and guesses can be made what about what the range of parameters might, in fact, prove to be. Furthermore, there can be little doubt ---although there has to be some-- that such guesses will prove to be good-enough for the majority of people. Life is not so capricious that prudent planing is futile. Good-enough planning can be done, and it has to be done. But what if “good-enough” is not good-enough for you? What if you're a very risk-adverse person who wants the very best that planning can provide you? What assumptions do you have to make? What actions do you have to take?

I'll tell you what I assume to be true, and what I am hoping will prove sufficient.

I do not eat my seed corn. I do not drawdown my principal. My investment assets are my means to create my living. And I will do whatever I have to by way of acquiring greater investments skills and/or taking on greater investment risks than I presently am in order to ensure that I will always and forever be able to protect both my principal and my ability to earn my living from that principal. The pension I have, the paid-for house I have, the Social Security benefits I am entitled to, etc. are all merely secondary reserves. If I die without ever spending a penny of them, then their existence was merely an insurance policy. They were there in place if I needed them. And if I have to eat some of my seed corn, for being confronted with the truly unexpected and truly horrific, then I will do that, too. But that is a measure of desperation, not the mainstay of my retirement plan. I protect and increase assets, and I exercise and increase skills.

I do not know how long I will live. I do know not how high inflation or taxes might be. I do not know what returns markets might offer. But I do know this. My investing supports me now. My hope --and it can only be a hope— is that my investing will be what supports me in the future. Whatever that future turns out to be, I hope to manage its risks and seize its rewards. As long as there are functioning markets, my plan is viable and my retirement can be assured no matter what the government or markets do, as long as I am willing to adapt appropriately to whatever the future brings. Thus, I do not attempt to project a benign future which offers little risk or uncertainty. The future will be what it will be: “Que sera, sera.”

I advocate this approach for no one else. But a track record of always being able to land on my feet, no matter what life has thrown at me, suggests --to me at least-- that my approach is viable and personally suitable. The choices others make for themselves will be for them to decide. Let's compare notes in another sixty years and see how things turned out for each other.

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When Life Gives You Lemons
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