Ten-year-old me grinned as the red striped golf ball, liberated from a local driving range, soared high into the air. In a graceful arc, the ball cleared the length of the Aussie Rules ground, the bike path, and the scrubland beyond. It landed with a satisfying splash in the middle of the creek.
Several boys whooped and cheered at the beautiful shot. In our made-up game of “Frustration”, hitting a ball in the creek on the full scored 10 points. Long ago we had carefully measured the distance from the goal line where we currently stood to the creek. 175 metres exactly.
I handed the ancient seven iron, the only golf club we had, to the next boy. He grimaced as he sliced his shot. Watching it ricochet off a tree and bounce down the road that ran alongside the playing field.
The golf club was passed around until we had run out of balls. We were all roughly the same size, and hitting from the same spot. Yet after dozens of attempts, only four balls had made it to the creek.
Most fell short.
More than a few went astray.
Some were lost or stolen. Bullying high schoolers. Long grass. Stray dogs. Thieving magpies.
The game taught us the importance of getting the basics right. Then repeatedly applying patience, practice, and persistence. Brute strength alone wouldn’t get the job done. Luck played a major part. Externalities interfered as often as not, predictably unpredictable.
Sometimes the game ended as anticipated, with smiling faces and an empty bucket of balls.
More often, things came to an abrupt halt. Third parties intervening to derail our fun. The competing priorities of others wishing to use the oval, walking dogs or playing football. Angry drivers or local residents seeking retribution for a dented fender or broken window after a particularly wayward shot.
After a couple of years, the game got easier. Scores went up. Complacency set in. For a time, we basked in glory, convinced of our awesomeness. Until my father let the air out of our tires when he observed that our bodies and egos had grown far more than our golfing prowess.
We protested in public. Reflected in private. Conceded he was probably correct.
All the boys chipped in to buy a nine iron. Resetting the game with a club that hit shorter distances in a higher arc. Learning the lesson that early success and overconfidence can be dangerous things.
Our game adapted. Very occasionally, with the help of a tailwind, one of us might still land a ball in the creek.
The great unknown
I was reminded of those childhood games of “Frustration” when the secret society of UK FI Bloggers voted to select decumulation planning as the topic for Sovereign Quest’s March challenge. The Accumulator had got them all thinking, after penning his magnum opus on the subject.
Decumulation planning is one of those horrible things that gets avoided and procrastinated over, like preparing a legal will or visiting the dentist. It forces us to confront some inconvenient truths.
A lifespan only knowable with any certainty in hindsight. By which time it is no longer our problem.
The fear that by the time we realise we will run out of money, we risk being too old, obsolete, or decrepit to do much about it. Little chance for do-overs. No saved games we can revert back to.
Attempting to predict the economic environment decades hence. Employment. Exchange rates. Inflation. Interest rates. Innovation. Pension rules. Social security. Tax policy. Rumsfeldian “unknown unknowns”.
Second-guessing future events and the decisions of political leaders who may not have been born yet.
And yet we plan because we must.
Recognising the risks posed by all that uncertainty. Seeking to minimise or mitigate their effects.
Reaching our own unique arbitrary and entirely subjective judgment of how much might be “enough”.
Everyone approaches this tricky puzzle in different ways.
Some seek comfort in the lies that only a precise and statistically certain spreadsheet can provide.
Others embrace the happy-clappy simplistic allure of “safe” withdrawal rates or rules of thumb.
Many choose to delegate the planning responsibilities to others. Accountants. Financial Planners. Investment Advisors. Lawyers. Wealth Managers. Still arbitrary guesses, but now there is somebody else to blame. Somebody who “should have known better”. Somebody who doesn’t have to live with the consequences should an undercooked plan be found wanting.
All the approaches require suspending disbelief. Surrendering to the unknown. Taking a leap of faith.
Certain? Far from it.
Satisfactory? Probably not.
But ultimately, it is all there is.
Our decumulation plans are behavioural documents, more than financial ones. Their level of detail dictated not by their likelihood of success, but by what it takes for us to sleep well at night.
Soothing our fears of the unknown, like a parent banishing the nightmares of an overimaginative child.
The results of my childhood game of “Frustration” were non-deterministic. Taking the same shot a dozen times produced a dozen different outcomes. Overshooting. Falling short. Wayward. Occasionally, bang on target. Randomness, an uncontrollable variable, was what made the game fun.
With practice and repetition, I hit the target more often. Building strength. Developing knowledge. Improving technique. Learning to adjust for externalities. Yet always the randomness remained
Uncontrollable randomness is the flaw of any decumulation plan: what will happen in the future?
It leads us to construct fragile plans around a series of assumptions. A veritable house of cards.
The mitigation paths for that uncertainty are few, and far from ideal. Conservatism. Hope. Faith. Luck.
There are no guarantees. A limited safety net. The window for recovering a plan gone wrong is finite.
A decumulation plan is a fine work of fiction that anyone can create. But before we do, it is important to understand some of the inherent assumptions and uncertainties that make any such plan fragile.
The first big assumption is also the most important one. How long does your money need to last?
Some folks wish to leave a lasting legacy. Have their money outlive them and do some lasting good.
Others wish to spend the lot. “You only live once” and “you can’t take it with you”. Throwing themselves on the mercy of the state, or the generosity of loved ones, to support them should they run out of money before they run out of time. Living a Benefits-FI kind of life.
A key, yet unknowable, variable in this equation is how long will you live?
Actuarial tables can tell you, on average, how long a person of your age, gender, and locale has left.
Averages that homogenise untold thousands of individual experiences. Every one of them different.
Averages that do not take into account your environment, genetics, health, lifestyle choices, luck, or socio-economic standing. Each of which plays a major role in determining your individual lifespan.
Kane Tanaka was born in 1903. The life expectancy tables predicted she would live, on average, for 44 years. Once Kane survived the perils of infant mortality, the tables revised their estimate, predicting she was good for another 48 years on average. She retired at the age of 63.
At the time of writing, Kane Tanaka was still alive at 118 years of age. An inspiring statistical outlier, and an excellent reminder that nobody experiences the average. If Kane’s decumulation plan had been based upon the actuarial tables, she would have outlived her money by more than 55 years!
Fortunately, Tanaka’s plan extended beyond numbers and spreadsheets. Her backup plan was maintaining strong relationships with loved ones, who had both the means and the interest to support her. Her fallback was living somewhere that offered a state pension and affordable healthcare.
When it comes to decumulation plans, we should hope for the best and plan accordingly. Anything less is planning to fail. Betting we will die young, or that the investing gods will smile upon us.
Hope is not a sound financial plan. Anyone who tells you different is trying to sell you something!
The second big assumption is how much is going to be “enough”?
Enough to sustainably survive.
Enough to support our desired lifestyle.
Enough to finance any of those bucket list activities we have dreamed of experiencing.
To cope with the unexpected. To remain healthy and active. To sleep well at night. To have choices.
Lifestyle costs are a recurring stream. Ebbing and flowing between two immovable boundaries.
At the upper end, lifestyle costs are constrained by our net worth and access to credit. Horror stories of broke celebrities, lottery winners, and sporting stars are clichéd for a reason. A cautionary tale for those planning to raid their pensions for a juicy lump sum of suddenly accessible wealth.
At the lower end, there is an absolute floor that a human cannot sustainably exist below. The exact position of this line is subjective. Not everyone is equipped to survive a life of homelessness, subsistence, and all that entails.
The cost of our chosen lifestyle is a very personal part of personal finance. Everyone has different hopes and dreams. Compromises and constraints. Priorities and obligations.
We can calculate those costs today with a high degree of accuracy.
But what about next year?
How about in a decade?
Thirty years from now?
Now those layers of assumptions are starting to really compound!
How will the price of those goods and services we enjoy change over time?
To arrive at a guesstimate, we are forced to make assumptions about what will happen with economic indicators and investment returns over our decumulation timeframe. Historical averages can provide a rough guide, but the lived experience is very different to a nice smooth line in a spreadsheet projection chart.
To illustrate, consider the events that cause economic highs and lows during a typical lifetime. Bankruptcies. Booms. Busts. Coup d’états. Crashes. Discoveries. Education. Fashions. Frauds. Innovations. Invasions. Investments. Medical breakthroughs. Natural Disasters. Pandemics. Peace. Recessions. Referendums. Riots. Sanctions. Tariffs. Technologies. Thefts. Treaties. Wars.
The table below contains a small sample of that variability, comparing long term historical averages to the highs and lows I have experienced in my lifetime.
|Historical Average||Experienced Min||Experienced Max|
|S&P500 Annual Total Return||9.19%||-37.22%||38.02%|
|Currency FX Rate||0.69||1.46|
|* Experienced high was youth unemployment rate, back when I was one|
The historical averages look unremarkable, yet the ride to get there has at times felt like a rollercoaster.
Next, we need to consider the composition of those lifestyle costs.
Condoms and beer are eventually replaced by blood pressure medication and high-fibre cereal.
Solo backpacking adventures might give way to family-friendly package holidays, before evolving again into all-inclusive pensioner cruises.
While the nature of these changes are largely predictable, their timing and cost are difficult to quantify.
Our health greatly impacts our spending profile. One of my grandmothers spent her 80s in a nursing home, wearing adult diapers and staring into space after Alzheimer’s stole her mind. By contrast, her daughter suffered a brain aneurysm in her late 50s, dead before she hit the ground.
Neither outcome could have been adequately planned for. Each had a major financial impact on their loved ones.
Finally, we consider some more of those troublesome unknowable unknowns.
Will we get divorced?
Relocate to be near our adult children?
Become financially responsible for our grandchildren?
Each of these major events would be life-changing. Potentially derailing a carefully crafted decumulation plan.
Yet none are uncommon.
When, and by how much, will the government change the rules after the game has already started?
Eliminating loopholes. Extending age restrictions. Means-testing benefits. Modifying tax rates, thresholds, and calculation methods. Undermining established approaches to wealth preservation.
Such changes will undoubtedly occur many times over, as politicians continuously fiddle and tweak the rules. Yet even knowing that these things are likely, there is little we can tangibly do with that knowledge.
So instead all we can do is choose not to worry about things outside of our control, and focus on those things that we can. Adaptability. Conservatism. Contingency. Flexibility. Plenty of padding to help absorb the shocks and weather the storms.
To some extent this is like raking leaves in the path of a hurricane. You never know, we might get lucky! It is the best we can do.
My day job could well be summarised as clients asking for my help to make their problems go away.
What the prospective client needs often greatly differs from what they think they want.
My superpowers include listening. Asking simple, yet (hopefully) intelligent questions. Calling out assumptions. Considering all the options. Ignoring preconceived ideas. Triangulating. Verifying.
These allow me to identify exactly what constitutes success, and where the goalposts are located.
Only then, once the actual problem is clearly articulated and understood by all, am I able to determine whether it can be satisfactorily solved. What an appropriate solution may look like. What it might cost. Whether I am the right person to help make the problem go away.
If key pieces of information are unknowable, as opposed to simply unknown, I usually advise the prospective client not to invest money they can’t afford to lose in an endeavour that will almost certainly fail.
True, they might get lucky. Stumble upon a workable solution before they lose faith or run out of money. However, that is just a gamble. Often an expensive one!
A decumulation plan represents one of those classes of tricky problems full of unknowable unknowns.
Yet despite all the limitations and uncertainty, the act of preparing a decumulation plan can be a useful exercise.
Just as my role helps a prospective client figure out what success looks like, and what steps are required to achieve it, a decumulation plan helps us to understand what might be financially possible.
Forcing us to think through what our success criteria are, and what we are aiming to accomplish.
Identifying milestones and pain thresholds. Determining tests to sound an early warning should things start going sideways, the proverbial canary in a coal mine.
If done well, we will have war-gamed a variety of potential scenarios to stress test our planning and numbers. This allows us to do some of the thinking ahead of time about how we might react and adapt when the unexpected inevitably occurs. Never complete nor comprehensive, but helpful nonetheless.
Industry luminaries such as Jeske, Kitces, and Pfau offer well researched insights on advanced techniques like glide paths, guard rails, and guidelines to help squeeze a little more distance out of our scarce precious resources. However, despite their best efforts, our spreadsheets cannot protect us from the single biggest risk to our decumulation planning: ourselves.
Have you ever panic sold during a downturn?
Did “fear of missing out” see you invest in the latest meme stonk, cryptocurrency, or non-fungible token fad?
Do you find yourself tempted by the latest shiny toy or the siren song of marketing messages?
Flipping the switch into decumulation mode will not magically confer common-sense, discipline, maturity, patience, or wisdom. We remain the same irrational, emotive creatures that we always have been. The randomness that makes us fun.
Therefore it is important to understand the assumptions and limitations of our decumulation planning. Not mistake precision for certainty. Nor confuse averages and probability with real lived experience.
A decumulation plan is a rough guesstimate, nothing more. The thinking done and self-awareness gained during the process is more valuable than the eventual output. Behavioural, more than financial.
For years, I would line up and take the shot in a game of “Frustration“. Focus on the things I could control. Attempt to shut out those I could not.
With a calm fluid swing I would seek to apply all my accumulated discipline, knowledge, patience, technique, and wisdom to achieving my goal.
Most of the time the shot went in the right general direction. Sometimes it went awry. Rarely did it hit the target exactly. Randomness always remained.
There were only two ways certain to improve the odds of winning. Move closer to the target or swing a bigger club.
It really was that simple.
- Bank of England (2016), ‘A millennium of macroeconomic data‘
- Bank of England (2018), ‘Official Bank Rate history‘
- Bank of England (2018), ‘Official Bank Rate history Data from 1694‘
- DQYDJ (2021), ‘S&P 500 Return Calculator, with Dividend Reinvestment‘
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- Essig, B., Ogura, J. and Jozuka, E. (2021), ‘CNN Exclusive: Aged 118, the world’s oldest living person will carry the Olympic flame in Japan’, CNN
- Indeedably (2018), ‘Normalcy‘
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- Ministry of Health,Labour and Welfare Homepage (2000), ‘Trends of the life expectancies at selected ages‘
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- Piastowski, N. (2020), ‘Bryson DeChambeau’s distances on his *other* clubs are also impressive’, Golf
- PoundSterlingLive (2021), ‘Australian Dollar Effective Exchange Rates for 1983 to 2021 from the Bank for International Settlements‘
- Reserve Bank of Australia (2021), ‘Measures of Consumer Price Inflation‘
- Rumsfeld, D. H. (2002), ‘DoD News Briefing – Secretary Rumsfeld and Gen. Myers’, US Department of Defense
- Sovereign Quest (2021), ‘March Challenge‘
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- The Accumulator (2021), ‘Decumulation: a real life plan’, Monevator
- The Accumulator (2021), ‘Dynamic asset allocation and withdrawal in retirement’, Monevator