Here are 4 lessons that I learned from my retirement planning and building my own retirement calculator.
1. It’s complicated, but not complex.
Often, complicated and complex are used interchangeably. As an engineer, I consider these 2 quite distinct. For example: IRS tax law is complicated, weather is complex, an organization chart for Google complicated, building a search engine is complex, etc. Complicate has a small number of interacting elements with reasonable boundary conditions that can be modeled and predicated. Complex has a large number of interacting elements without clear boundary conditions. Precise predictions beyond a small window of time are difficult. I didn’t know what to expect when I started financial retirement planning, but I now realize, it’s complicated but not complex.
- There are a lot of new regulations and rules to learn. However, I only need high school math and simple programming to model.
- It’s easy to get into the weeds with lots of details, but most of the details don't matter in the long run. I started with a detailed breakdown of my expenses and accounts, but quickly realized that as a portfolio, the law of average works in my favor. These details will average out over time.
- We have reasonable and clear boundary conditions. Stocks can drop significantly, and inflation can be very high. We have sufficient data gathered over the year to be confident in the law of average and statistical deviations
We can build accurate models and make reasonable long term prediction based on known regulations and historical data
2. Get comfortable with planning, but be uncomfortable with the plan.
I manually ran over one hundred models and what-if scenarios to better understand the relationship between the assumptions and prediction outcomes. I have a high degree of confidence in the planning process. However, I know that the details of the plan will not survive more than 2 or 3 years. Planning must be a continuous process. Awareness of the factors and assumptions made during the planning process is the key. I have a much better intuition about inflation rate, tax brackets, Medicare, and required minimum distribution plays into my plan and how it changes over time.
3. Get comfortable with thinking about end of longevity
It’s never easy to think about the end of life. A very conservative assumption about my longevity would likely adversely affect my quality of life. I want to enjoy my retirement and spend my hard earned money. Using the current average lifespan of 77.5 when I’m already in my 50s seems too aggressive. Average still means wrong 50% of time, and the cost of being wrong is quite severe.
Longevity is more than a number, I have to consider the quality of our lives and long term cognitive ability. I want to maximize the quality of my retirement life, especially during the earlier retirement years, and understand there is risk of cognitive decline as age advances. I can’t assume peak health and mental acuity the whole time. Also, many people need long term care as they approach the final 2 to 5 years of their lives. I need to put in plans for reduced health and mental capacity while I still have good health and sharpness of mind.
4. Get comfortable with numbers. Your intuition doesn’t always work as expected.
When I started the process, I had some intuitions and assumptions. Here are just a few of my personal examples.
- Tax is bad, I want to avoid paying tax as much as possible.
- Tax-free retirement money (Roth IRA) is better than tax-deferred (401k) money.
- Take advantage of Roth conversion or contribute to Roth IRA when possible
- My tax rate in retirement will be lower
- Estate planning is for people much richer than me.
- Medicare will take care most of my 65+ medical needs
Once I examined different scenarios and variation of plans and the numbers, most of the assumptions turned out to be much more nuanced. This is where experienced advisors really shine. Don’t simply rely on do-it-yourself software packages.
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