Is Maximum Optionality The Most Important Gift You Can Give Yourself?

People might have to do things they don't want to do or didn't think they'd have to do.

We talk frequently here about the undersaved state of most Americans in terms of retirement planning. This has been a long, steady trend years ago getting to the point where the average and median numbers are dreadful. There are all kinds of heuristics (fancy word for rules of thumb) for how much we need to accumulate to have a lifestyle-maintaining retirement. I've never been a fan of the your number concept because your number doesn't matter at all in relation to what you wind up with. Someone can tell you at 40 you need $1.3 million but if you retire with $421,000 then that is your reality and you will make that work one way or another because you have to. I acknowledge that $421,000 (a number I made up) is way above any sort of average or median number you will find out there.

The building block of understanding for sustainability of however much you end up with is that a 4% withdrawal rate has never failed looking backwards and in testing outcomes with a Monte Carlo Simulator, 4% succeeds more than 90% of the time. That doesn't mean if you take more than 4% you will end up homeless, eating in a soup kitchen. A 5% withdrawal rate has a very high chance of success too, just a little less than 4%. All advisors have clients who take way more than 4%, I certainly do, and thanks to market performance of the last ten years it has worked out just fine for those folks.

While I doubt 5% would do people in, at something like a 7% withdrawal rate you need to be more nervous. A lot of smart investors are expecting average annual returns over the next ten years to only be in the 2-4% range annually. I am not concerned with trying to argue why that may be right or may be wrong as opposed to understanding the impact on clients if those types of predictions turn out to be correct.

One part of this story has been the possibility/reality that people will not be able to retire. This was the topic of a conversation on Charles Payne's show on Fox Business with Donald Luskin. Luskin has been a TV pundit for years and if you do a little search you will find plenty of heavy criticism of Luskin for all kinds of things he's said over the years. Payne opened the segment with kind of a this appears to be a problem, what do we do about it tone and Luskin offered a very surprising spin. Quoting him, he says "what to people do when they retire? How do you spend a day? I mean, is bowling that interesting? Is fishing that interesting? I happen to love my work. Why do I wanna stop it, this is great! What a great country where we have the opportunity to keep working, what a miracle that we're healthy enough and mentally alert enough so that we don't have to retire like generations before us, this is a great blessing, you should embrace it."

If I was writing this as a text message I would insert the two big eyes looking, or the face emoji with no mouth. I sense an equivalency here to a comment from Bobby Knight ages ago about rape.

Insensitivities aside, there are some realities here and no one can know when their realities will come into play. We all confront realities with our healthspan and our finances. A huge priority for me personally is to not have circumstances dictated to me, where I have my hand forced in such a way where I have scramble in a desperate fashion to fix a circumstance.

Obviously, outcomes in this regard are beyond our control but inputs are within our control. In terms of health, there's some number floating around where more than 80% of the population is metabolically unhealthy. I have no idea if that is accurate but intuitively we all know it is very high. We have control over the inputs, our diet and exercise habits.

With our finances, we have some amount of control over our savings rates and spending habits and we can train ourselves to not succumb to the type of panic that would cause meaningful portfolio selling after large declines.

When you proactively take action to improve your health and finances you are giving yourself more optionality. Similarly, if you put time in to figure out how to monetize a hobby in case you need it later is a way to give yourself more optionality. There are plenty of other examples

In terms of retirement planning, I have often talked about coming to retirement without enough money which means something will have to give. You might have to work longer or spend less or seriously downsize or something else. If you get to some sort of retirement age but the thing that needs to give for you is working longer (same job, new part time job, whatever) it obviously would be better to be physically able to work.

You have further optionality by not spending $500/mo or $1000/mo on medication to treat chronic maladies. No absolutes of course but chronic maladies can often be avoided or reversed with behavior modification.

Anything that inhibits health or finances or how you spend your time reduces optionality, adverse outcomes on these fronts serve to dictate terms or force your hand. While Luskin's comments about being grateful for having to work (how I took it) are wildly insensitive, some folks will have to do things they don't want to do or didn't think they would have to do and in the face of that possibility, giving yourself as much optionality as you can is the best gift you can give yourself.

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