Safety v. Risk in Retirement Part 5 - Final Reflections

So what have I learned from reading these three books on income in retirement?

This is Part 5 in which I offer some summary reflections on the income retirement books I read this past month. This Part 5 follows:

Part 1 - Introduction to Reviews of 3 Retirement Income Books

Part 2 - Pensionize Your Next Egg by Moshe Milevsky

Part 3 - Retirement Portfolios: Theory, Construction, and Management by Michael J. Zwecher

Part 4 - Redefining Retirement: A Safe and Secure Way Down the Mountain by Wade Pfau

My point is reading and reviewing the books was to force myself to engage with a set of ideas I was pretty sure I disagreed with from the beginning.

(I put a paywall on the last few points below but you could watch the 6-min video linked here and hear them all. Or you could access the subscriber-only content in another logical way…)

Safety v. Risk in Retirement Part 5 - Video Version - Final Reflections

But in that disagreement, what could I learn to change my mind or to reinforce my priors? Some summary thoughts:

1. I like the framework used by Wade Pfau that retirees (and their investment advisors) can choose a “safety first” approach or a “probability-based” approach. I am still “probability-based” in my outlook but the disadvantage I should acknowledge is that there still some chance (5%? 10%?) that the odds will not be in my favor. I could live too long in terrible markets and run out of money.

   

   Relevant to the “Probability-based approach, but not the “Safety-First” approach.

2. I should give stronger consideration to the idea (in my own life, and in giving advice) to the idea that covering known lifestyle costs throughout late life is a pretty big deal. It’s a worthwhile problem to solve.

3. Many people - for perfectly reasonable risk tolerance and personality reasons - will accept a lower average standard of living in order to eliminate the even-remote possibility of “failure.”¹

4. The classic Bengen Rule of 4% withdrawal rate for 30 years - we should remember - was invented as a “no fail” rule. So even though it is too conservative, it was not built for 98% success. It was built for 100% success. As such, it introduces the big problem (addressed by the retirement income crowd) of being way too conservative with investment portfolio draws. Thus lowering funds available to cover lifestyle costs and also leaving “too much” money for legacy rather than lifestyle comfort, for most people.

5. One potential reason some people are blind or indifferent to the value of “income in retirement” is that it matters a lot more to middle income and middle wealth people. The outliers above and below see much-diminished benefits from creating a pension or carefully covering lifestyle costs. They either have plenty no matter what, or not enough no matter what.