Cost of safety...in reverse

In a prior post (B-Day Post and also the Cost of Retirement Safety) I was riffing on a page at aacalc.com that discusses the "cost of safety."  In this case the author was explaining the economics of diminishing returns for increasing savings in order to reduce fail rate risk.  Going from a 20 to 5% fail rate was more than 2x the incremental new retirement saving required than going from 35 to 20%.  It dawned on me that this analysis can be done in reverse.  In other words, depending on one's absolute spend rate one could estimate how sensitive the fail rate is to imminent changes in the endowment.

For example, in the prior post we had a 59 year old with a $35,000 spend rate among other things which meant, given the particular sim runs I did, going from a 13.3% fail rate at a $1M endowment to a 3.75% fail rate would require an additional 400,000 in savings which is quite a bit more than going from 22.9% to 13.3%.  The other way to look at it though is to say that for that spend rate (lifestyle), if my savings were at $2M or $1.5M or $1M, how sensitive would my fail rate be to a 20% drop in my endowment all else being equal? The answer in points different is this:

2.0M   01.40 points more in fail rate risk for a 20% drop
1.5M   06.13 point increase
1.0M   22.03 point increase

So, non linear.  Plus it points out a pretty stark policy decision one could make. By that I mean that if I have (and if I know I have) investment behavioral problems and if I have more or less inelastic spending ... and let's say I let someone along the way, an advisor or retirement guru perhaps, talk me into a more expansive lifestyle because they had some secret sauce for spending more, then I might be too deep into a plan (too far up the curve in other words) that is too sensitive to changes in my portfolio...for me, that is.  See, that's the thing.  I read all these savvy retirement finance papers on cool ways to maximize spending safely and what it means to me is not just that these people are taking you to the very frontier of what I consider as prudent, they are also taking you to the slippery slope of sometimes radically increased sensitivity to problems should problems occur.  And those gurus and advisors will not be there to help you out with a check or cash when it happens, I can tell you that.

The policy decision part of this might be to do some analysis on risk aversion and on sensitivity analysis and, if one still has the choice to save more, maybe save to a point on the curve where one thinks one can handle the intensity of the changes in fail rate estimates that will come when a market correction arrives, one that goes too deep and/or lasts a little too long. This is probably similar analysis to floor-and-upside stuff but that might be another post.