Notes, Views, and the Occasional Provocation
March / April 2019

Perusing popular children’s books or the U.S. Bureau of Labor Statistics job classifications reveals a wide diversity of careers and occupations by which the world often defines us. When people stop working, though, the financial services industry seems to view everyone as essentially the same and recommends retirement solutions accordingly.

However, creating a custom retirement plan requires more than a comparison of spending needs relative to resources. The most robust and creative plans depend on a host of variables that are particular to your circumstances, which is why personal finance is, in the end, more personal than finance and why retirement planning is more than a math problem.

Best regards,

Milo Benningfield


A Custom Retirement Plan is Not a Math Problem

A couple of decades ago, I met a cab driver named Janice who drove me home from the airport. She was a woman in her early sixties who described how she lived in Panama for most of the year and came back to San Francisco to work each autumn. “I earn all the money I need for the rest of the year in just about three months here.”

She had cheap rent in Panama City; the modern, air-conditioned movie theaters provided refuge on hot days; the Panamanians were nice.

“What made you brave enough to do all this?” I asked, as we rolled through Golden Gate Park.

She laughed. “I’ve been doing ‘this’ my whole life.” She described how she’d dropped out of college during a foreign exchange program, followed a boy around Europe for a while, and ended up back in San Francisco, where she’d worked a series of jobs over the years. “Now, I’m basically retired.”

“Sounds like a great set-up.”

“Yes, and it drives my sister the lawyer crazy. ‘What are you going to do when you get old?’ she kept telling me. She quit her job two years ago and now her 401(k) is trashed. She may need to go back to work, but wonders where at her age?”

I knew the story. A lot of retirement plans had been upended over the past couple of years as the S&P 500 Index slid by almost half after the dot-com bust. A lot of people felt misled by the nearly twenty-year bull market that came just before.

“I don’t want to gloat,” Janice said, as she dropped me off, “but I never trusted the system.”

Over the years, I’ve continued to think about Janice and her sister. At different points along the way, one or the other would have been happier with her retirement choice. Janice’s part-time employment meant she didn’t have to worry about the markets. But if her sister stayed invested, she probably could have avoided going back to work. She would have faced another test with the financial crisis at the end of the decade, but Janice’s work was contingent on her health, and she may have had to make adjustments with the rise of Uber and Lyft, which decimated the taxi industry.

Sustaining income over the course of several decades has always been a challenge. Even professional money managers have trouble with it, as evidenced by the pension troubles around the country. A few weeks ago, the Vanguard Managed Payout Fund surprised investors by cutting its distribution rate by a whopping 8% – its second cut in the last several years – undermining confidence in what some people considered a one-stop income solution.

At the beginning of retirement, all we really know is that financial circumstances will keep changing in ways that will continue to surprise us. In the early 1970’s, after the booms and busts of the 60’s and the dismal ’73-’74 recession, few people fleeing stocks for bonds could foresee that rampant inflation would soon decimate the purchasing power of their supposedly safe interest payments. More recently, it was difficult to know that plain Treasury inflation-protected bonds would top exotic and supposedly superior income strategies like real estate trusts, oil pipelines, and business-development companies in the ten years after the 2008 financial crisis.

To cope with this uncertainty, the ideal retirement plan is one that is capable of adapting to financial change, heeding the writer Paul Auster’s warning that “if you’re not prepared for everything, you’re not prepared for anything.”

For people who’ve saved, there are a variety of strategies that can help with this. Diversifying investments; combining different types of income; moving to a lower-cost area to reduce spending needs – all these help make a retirement plan more robust and flexible, like a dandelion that can survive anywhere, even a sidewalk, rather than an orchid that can only display its beauty under narrow conditions.

The trouble with flexibility, though, is that it requires compromise. Protecting the downside usually means relinquishing the upside. Adding bonds to hedge stocks in a portfolio almost assuredly means lower returns. Carving out cash reserves for surprises means that money can’t be “put to work” in the portfolio. Limiting portfolio withdrawals for current expenses to avoid running out of money later means accepting less money now.

Figuring out which compromises are worth it is the crux of good retirement planning and why it’s more than a math problem. It’s a financial and life-design problem, where the best choices often derive more from individual preferences than from financially optimal solutions, which is why we say that personal finance is more “personal” than “finance.”

For example, a low-cost immediate annuity offering guaranteed income for life is an excellent way to strengthen a retirement plan. However, some people would rather risk running out of money later to avoid handing over money now to an insurance company that will keep it if they die prematurely.

Similarly, for people who can afford to wait, deferring Social Security benefits until age 70 in order to increase the monthly income by almost a third is often financially optimal. But if starting the benefits earlier to replace the security of employment earnings will make someone less prone to devastating behavioral mistakes with their investments, then it doesn’t make sense to wait.

Figuring out which compromises are best can be tricky and even more so when there is more than one person to consider. Financial software can help with planning models to compare scenarios and evaluate the sensitivity of variables such as spending or investment decisions. But the software can’t tell you who you are and who you will become as you move through the next decades of life in retirement.

You have to start somewhere, though, and sometimes a simple question can help:

What are you most afraid of?

For many people, running out of money tops the list. Others fear more the remorse that would come from deferring a long-held dream further. For Janice, who “didn’t trust the system,” the markets presented the main threat. Her sister may have feared losing more precious time to a job she disliked.

Combining Janice’s human capital and low overhead with her sister’s investment resources would have created an ideal retirement plan. But “all of the above” is rarely feasible in real life, and we must make choices.

The good news is that grappling with limits can spark more creative thinking about our plans. Shakespeare arguably wrote better plays because he was constrained by the use of iambic pentameter, which lent music to his words. Financial constraints force us to figure out the essence of our dreams and pinpoint what we’re really trying to accomplish.

What do ideas like “foreign travel” or “vacation home” or “being closer to family” really mean? Sometimes, a closer examination moves us away from “living by default” and standard-issue retirement ideals into a more thoughtful plan that reflects our true interests.

Having to think in detail about what’s important as we move into the later chapters of our lives can also help us imagine more flexible ways to accomplish what we want. Why risk our capital with a vacation home when we could rent a place anywhere in the world and sleep better knowing we haven’t overextended ourselves?

Retirement is often defined as what we’re moving away from – work – but building a robust and flexible plan that uses the right financial tools for the job requires us to address a more interesting and potentially exciting question: What do we want to move towards?

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BFA Media Quotes

Fortune.com, February 8, 2019
Milo’s article “The Perils of a Cashless Economy” was cited by Lucas Larsen in “The Backlash Against Cashless Stores is Growing”, which discussed a New Jersey law requiring retailers to accept paper money. The article noted Milo’s argument that “frictionless transactions” could lead to overspending.

Thank you for reading.

Best regards,

Milo Benningfield

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