In our post of April 5, we encouraged you to develop a strategic plan for retirement that considers your spending goals, your tolerance for risk and your other preferences. We suggested that you could accomplish this task by using our Recommended Financial Planning Process, which we believe is a relatively simple and straightforward process. Of course, what may seem simple to one person may be complicated to another. While our recommended process does involve calculations of present values, our Actuarial Budget Calculator (ABC) workbooks perform these present value calculations for you, thereby significantly simplifying the process in our opinion.
From the inception of this website, we have heard from individuals that our approach/process is too simple. Others have indicated that it is simply too complicated. Naturally, we prefer to view these opposite levels of criticism through a Goldilocks-tinged “just right” filter.
Subsequent to writing our April 5 post, we came across two posts from other financial bloggers that may be of interest to readers who are shopping around for a more reliable retirement planning process. Of course, the transparency or simplicity of a financial planning process is just one factor to consider in selecting an approach to use. Obviously, the efficacy of the process (especially as it applies to you or your client) is also a very, if not a more, important factor. There are many things in life that we don’t fully understand just how they work (think of your car or smart phone as examples), but we use them because they meet our needs.
The first post, written by Will Selden at the RiversHedge.blogspot.com on April 6 refers to our process as being “pretty simple.” The second post, written by Derek Thorpe at Kitces.com and encourages financial advisors to make complicated Monte Carlo simulations more relevant by “finding the right level of abstraction.” We will briefly discuss these two posts below.
RiversHedge Post
Will Selden approaches retirement finance from a deeply mathematical perspective. We have to admit that we don’t really understand a lot of the math that he uses, so it is not surprising that Will finds our approach to be pretty simple. In his post, he says:
Ken Steiner's Simple Approach.
Ken, at http://howmuchcaniaffordtospendinretirement.blogspot.com/ has a pretty simple approach. I was going to call it "blindingly simple" but it does take a little bit of thinking to get into it. He says: use an "actuarial balance sheet" (ABS). That's it. Basically ABS is a feasibility test which, when run dynamically, becomes a sustainability methodology. It is exactly what I use myself more than any model I have ever built. There is no super-integration, no OCD historical model-fit, no excess complexity…Is there stochastic volatility or stochastic present value or Cholesky decompositions? Nope, and the ABS approach does not suffer for its lack.
So, even though we don’t employ Cholesky decompositions (?), our approach apparently doesn’t appear to suffer too much in terms of its effectiveness. Thank you, Will.
Kitces Post
In their post of April 7, Derek Thorpe and Michael Kitces double-down on their proposal to incorporate probability-of-success-driven guardrails into typical Monte Carlo financial planning models as discussed in our post of March 7, 2021. Messrs. Thorpe and Kitces summarize the problem with traditional Monte Carlo probability of success models as follows:
Notably, the problem with many Monte Carlo-based retirement analyses is not necessarily with Monte Carlo itself, but with trying to find a better abstraction for communicating Monte Carlo results. At a minimum, an ideal abstraction likely needs to cover both relevant likelihood and magnitude of success/failure. Furthermore, an ideal abstraction should convey that success/failure themselves can be a bit inaccurate in a world where ‘adjustment’ can avoid the most extreme outcomes.
We personally found the Kitces post a little too abstract for our taste and admittedly somewhat confusing, but we leave it up to you to read it yourself in order to decide whether their proposed “better abstraction” utilizing probability-of-success-driven guardrails is something that sounds transparent, simple and more effective to you.
Summary
Whether our recommended actuarial financial planning approach is too simple or too complicated is largely a red herring. The more important question is whether it is effective in aligning your strategic spending strategy with your retirement spending goals, your tolerance for risk and any other preferences you may have.
Unrelated note: Our ABC workbooks are Excel spreadsheets that you can download and save in your computer. Unlike some other retirement planning tools available on the internet, we do not maintain the data you enter into our tools. While this may have some downsides, no one can hack our website to obtain your data. In an age where data hacking appears to occur fairly regularly, this may be an important consideration for you.
