Personal Finance FAQ

The Difficulty of Predicting Your Retirement Number

Yours is in there somewhere.

“It is likely that unlikely things should happen.”

Imagine that you’re sitting in an airplane, and suddenly there’s some bumpiness. The plane shakes a little and dips and rises. The pilot comes over the intercom and tells you to buckle up because you’re undergoing a little bit of turbulence.

Gripping the seat a little tighter? Sweaty palms? Reconsidering asking the flight attendant for a couple of stiff drinks?

This is the reaction that a lot of people have when they’re flying, even while they try to put on a brave face about the whole affair. Because we’re not in control, we’re scared to death of dropping out of the sky like a shot bird.

The reality is that the chances of being involved in a plane crash are extremely remote, to the tune of one in ten million. Yet, while we’re up in the air, Monkey Brain doesn’t believe that statistic one iota. Suddenly, at the first wave of turbulence, you’re that one. Forget the other 9,999,999 planes which went up and came back down without incident. You’re the one.

Why can’t Monkey Brain rationally deal with the true probabilities?

The problem is that, according to the University of Rochester’s Dr. Ben Hayden, we’re terrible at dealing with probabilities which are either zero (the chances of me making the U.S. men’s soccer team) or 100% (the chances of the sun rising tomorrow morning). Anything in between, and we tend to drag the number towards the average. What’s worse is that we underestimate higher chances – anything above 40%, and overestimate lower chances – lower than 40%, and we get worse as that probability approaches zero.

Chances of a plane crashing? 1 in 8 million. Monkey Brain’s interpretation? One in a hundred.

Not only does Monkey Brain think that every plane that you are on is going to fall out of the sky, he’s terrible at trying to figure out what’s going to happen to the future you, and this can really impact your retirement planning.

I’m sure somewhere along the way, you’ve heard about the retirement “number.” It’s the target that you’re supposed to be aiming for when doing your retirement savings. Hit that number in your retirement savings, and voila! Done. You can retire. (For further reading, find out what else you need to do BEFORE you retire!)

Allow me to walk you through the process of how I work on telling you what I think your target is going to be. Remember, it’s never a hard and fast number, even though, once you hear it, you’re going to be subjected to the anchoring bias, which means that once you hear a number, you’re going to focus your attention on that number, even if other information should cause you to change your mind.

I will gather up as much of your personal information as possible regarding your history, your situation, and what you think your future will be. I use actuarial tables and industry data to project the likelihood of things happening to you as well as to use information about the stock market, bond market, and inflation to determine what will happen to your investments and spending.

Since I am not omniscient and cannot pull out my magic Kreskin crystal and tell the future, I use what is called Monte Carlo analysis to play out thousands and thousands of possible futures (what if you get hit by the beer truck tomorrow? What if you live to be 105 years old? etc.) – a mathematical version of the Star Trek (#aff) alternative reality when Spock and the Romulans went through the black hole.

Based on all of those inputs and some random number generation, I can get a pretty good idea of whether or not your plan, assuming you stick to it, can get you where you want to be when you want to get there. It’s not foolproof, but it will give you a reasonable estimate of the range of outcomes and your chances of success.

There are a couple of ways in which probabilities affect Monkey Brain when it comes to determining the “number.”

  • Estimating what’s going to happen to you later in life. As I mentioned previously, I have to use some inputs from you about what’s going to happen to you in life. For example, if you’re a smoker, then you’re doing your body a disservice, and you’ll probably not live as long as a nonsmoker. If you tell me that you’re probably going to quit in the next three months, chances are that you’ve overestimated the likelihood of you quitting smoking, and, therefore, caused me to overestimate your life expectancy in my simulations. Quit smoking. It’s nasty.
  • Sweating missing the target. On the flip side, if you’ve done and continue to do all of the right things, and it’s going to take a complete meltdown in the world economy and civilization to cause things to go belly up, Monkey Brain will still find it hard to kick back and relax (yes, I know this goes contrary to all of the images of Monkey Brain I’ve previously given you). He’ll start focusing on the end of the world scenario and tell you that you should start stocking up on canned guns and bomb shelters NOW. Even though it would be nearly impossible for your plan to fail, since it’s not impossible, Monkey Brain will inflate the likelihood of failure.

Another outcome of all of these probabilities is that Monkey Brain will poo-poo your need for insurance. He doesn’t want you to buy life insurance because, hey, you’re never going to die! He doesn’t want you to buy long-term care insurance because you’re going to also have perfect health forever. Negative outcomes in life are things that Monkey Brain doesn’t like to consider, and so, no matter what the probabilities, he discounts them enormously and tells you not to worry about it.

It’s like thinking that tornadoes only land in mobile home parks. Or that your plane is the one that is going to go down.

How can you keep Monkey Brain from playing havoc on your retirement number?

  • Remember, it’s just a number, like any other. The exercise that we go through in doing the Monte Carlo analysis is to give you a guide and to give you a feel for the reasonableness of your plan. It’s not a hard and fast number. If you fall a dollar short, you won’t become the bag lady or a cat food connoisseur.
  • Be ready to adjust, as needed. A lot of people think of this as decreasing spending in retirement if they find that they don’t have as much as they thought, but it can go the other way as well. If you have a lot more than you thought, you could retire earlier or spend more in retirement. However, it would be unwise to plow forward with what was laid out for you however many years ago if the circumstances have changed. You’ll either leave money on the table or you’ll wipe it out. Remember, we’ll look at thousands of potential futures, and none of them will match what actually happens to you.
  • Don’t sweat the small stuff. If there’s a really low likelihood probability of something happening, then don’t let it get to you. If you have a high probability of succeeding, then don’t focus on the outliers. They’re very unlikely to happen, and all you’re going to do is release a flood of cortisol into your system, which isn’t healthy for you.
  • Always work to improve your plan. If we decide that your plan is probably going to work, what are the things that you can do to raise that to an almost certainty? Save a little more, spend a little less, and constantly revise. A corollary to this notion is that the closer you get to a destination, the more confident you’re going to be in your estimates. If you’re driving across town, you may estimate it will take between 50 minutes and an hour to get there. When you’re a mile away, though, you can probably narrow that estimate down to within thirty seconds.

Next time you’re on an airplane and encounter a little bit of turbulence, think of it as if it were a car going over a little bit of bumpy road. The car is MUCH more likely to crash than the airplane, but, since Monkey Brain was never good at math and he thinks he’s a better driver than anyone else on the road, he won’t worry about crashing.


Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

2 replies on “The Difficulty of Predicting Your Retirement Number”

You went in a bit different direction, but another problem with the idea of “The Number” is that as interest rates change everyday, so does the cost of funding an income stream, and thus, so does “The Number”

You and I should come up with “Heisenberg’s Theory of Retirement Number Uncertainty.”

Yes, you’re right. Unless (and/or) until the time that you lock in an inflation-adjusted income, assumedly with an annuity, the target moves. When you’re 25, the amount the target moves it enough to make you sick. When you’re 60, the wiggle has probably decreased quite a bit.

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