Hindsight 2: the continuous unstable present vs the future

I used to imagine that retirement planning was all about the future.  This is a forgivable illusion of course (at least when starting out) because one is forced, when planning, to think about things like planning horizons, death dates, future long term care costs, simulations of future spending and returns, bequests to heirs at death, fear of running out of money some day, social security start dates and so forth.  It took me a while to dial back this impulse to if not try to predict at least project oneself too far into the future, a future that doesn't really exist and won't look like the future you expected if and when you get there.   This future-think is important of course and needs to be examined but once that has occurred I think the day-to-day practice of retirement becomes a different game.


The longer I do this the more I have come to appreciate that retirement planning sometimes is not so much about the future as it is about a continuous and unstable present with new and conflicting signals coming in, changing terrain under our feet, and mutating goals that probably shift more often that we'd like. It's a little like skiing.  There is a plan perhaps and we might keep our thoughts on the end-game in moments where we are not aiming for a tree but inattention to the real ground and slope at our feet and and the slope just beyond and/or the inability to make continuous micro-adjustments in the present moment can be, at best, unhelpful.

Let's look at simulation.  Simulation tries to peer into the future but we all know or should know it doesn't predict the future. We also know or should know that this is a tool that should be run and re-run as things (assumptions, market signals, health info, etc) change. In other words it should ideally be a tool that encapsulates the way we think about the world and what might happen into a judgement in the present moment now. So it's not a crystal ball it's more like a "net present risk" calc with risk "discounted" to today.  There on the table is the number (say a fail rate estimate) that we have today...what are we going to do about it today? Then the same question is asked again tomorrow, maybe with a different answer.

I have a lot of fun with simulation, of course, but for the reasons above I also have a lot of respect for other methods that bring disparate sources of information to a point in the present which then challenges us to ask ourselves what we are going to do about it now. Take action? What action? Wait? How long? Something just happened, were we ready, etc.  Simulation is referred to as a sustainability metric and works well within its domain and can help a bit with that focus on the present.  Then there are the other methods. The ones I'm thinking about here are generally referred to as feasibility metrics.  These are important I think because the further I go in retirement the more I appreciate that the game (while future-think is still important) is more critically about surveillance, monitoring, vigilance, and adaptation.  To requote Patrick Collins from something in a previous post:

"Although penetrating the [free] boundary is not an event that generates an explicit signal—there may be many thousands of dollars remaining in the portfolio at the time the boundary is breached—it nevertheless is an event that the investor should not take lightly. In terms of portfolio management, it is perhaps the single most critical piece of information that the investor should know. The existence of the feasibility condition puts a premium on intelligent monitoring. It is crucial to know how likely it is that even a one standard deviation move to the downside of the forecasted mean return could prove to be an economically non-survivable event. The investor needs to know whether they are in trouble, not whether their equity position has outperformed the S&P 500...This is a solvency question; or, in terms of the free boundary problem, it is the amount of wealth that separates the region of feasibility from the region of infeasibility. It is not a future oriented prediction; it is a question of the adequacy of current resources. Determining shortfall risk and quantifying solvency by locating the free boundary are both important components of risk assessment, and both provide important feedback regarding asset management dangers and opportunities." [emphasis added] [1]

There may be billions of these methods for monitoring feasibility in the real time present that I have not run into. Simulation (sustainability analysis) if properly viewed in present-time-risk/summary-metric terms (more like feasibility?) might be one.  But here I am thinking about two other approaches in particular: 1) the "free boundary" concept of determining whether one is getting too close too fast to the line where the option of exiting out of self annuitization by buying an annuity becomes a foreclosed opportunity, the approach described by Collins in the note below, and 2) the actuarial balance sheet approach championed by Ken Steiner at howmuchcaniaffordtospendinretirement.blogspot.com/ as well as others. Wade Pfau has written on this last as well and refers to a funded ratio which is more or less the ratio of assets to liabilities on that actuarial balance sheet. Note that the distinction between one and two is arbitrary and the two are not really unrelated. The first depends on awareness of the second.

Both of these two approaches when plugged into a "process" of retirement monitoring and surveillance become powerful tools.  While the balance sheet approach has been criticized for being too deterministic or oversimplified or too unaware of future twists and turns it is also a necessary component of planning.  But to some extent those criticisms are easily solved.  For example, Mr. Steiner, finally, helpfully, addressed this in a recent post and reminded his readers that the balance sheet approach needs to be tied at the hip to stress testing and scenario analysis (which is the same point Collins is making above in his reference to a one standard deviation move, and a similar theme comes up on Dirk Cotton's site with respect to strategic planning) which makes it in some ways more useful and powerful than a simulator although both are dealing with the same underlying real world processes.  This also slides the balance sheet approach a step towards conventional strategic and tactical planning which is constructive I think.  There is more to say on this type of subject of course but the point here is to say that in hindsight I wish that I had understood earlier in my retirement the difference between sustainability and feasibility (to the extent that they are different), the importance of feasibility in particular, and also how important the management of a continuous, unstable present is to what happens in the future...and not the other way around.


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[1] Monitoring and Managing a Retirement Income Portfolio, Copyright: Patrick J. Collins, Ph.D., CFA, Huy Lam, CFA, Josh Stampfli, MS EESOR [2015]