Dirk Cotton on Uncertainty

I was reading and excerpting a recent post by Dirk Cotton at The Retirement Cafe on managing uncertainty in retirement. My problem was starting to be that the excerpts were tending towards being, in effect, a copy of the whole post. So go read it...

Some Risks Can't be Modeled, Dirk Cotton

The shortcoming of MC simulation is not that it will create unrealistic scenarios — quite the opposite — it won’t generate many highly unlikely outcomes. So, even after we test retirement plan risk with simulation we still don’t know much about the effects of low-probability catastrophic events…After simulations, we still need a way to plan for the unknowable…Avoiding unforeseeable risks is clearly not an option. It's hard to steer around an obstacle you don't know is there…The best spending rules won’t eliminate these risks. After a long sequence of poor returns, they will simply reduce safe spending to a level that no longer supports the household’s standard of living. Nor will the best simulation software ferret them out and suggest fixes….Low-probability catastrophic outcomes defy avoidance and mitigation but they’re worth contemplating and possibly worth insuring.