It helps somewhat that fixed income returns are rather predictable. Barring default it is basically mathematics.  If everything is paid on time, yield to maturity is what you will get between now and maturity.

What I see and hear often of late is planners changing the inputs of planning software to reflect equity returns below that of the historic record and today’s lower interest rates. Not surprisingly, the results of simulations indicate lower probabilities of success.  I lost count a longtime ago of papers pinning the safe withdrawal rate under 4% or otherwise declaring the 4% rule a relic or pipe dream. 

I have concerns with this approach, particularly when it assumes the range of results will be skewed lower for the entire lifetime of the family whose retirement is simulated. The trend is to call the historic record too optimistic.  Fine.  But extrapolating today’s condition into the next 30 years or more strikes me as overly pessimistic.

Successful financial planning is bringing realism to a clients’ thinking but it is also about putting families in position to maximize the odds they can get what they want out of their life. If we are overly optimistic, we underestimate the probability and severity of a mid-course correction. If we are too conservative with our assumptions, don’t we improve the odds clients won’t run out of money? 

Of course. However, the flip side of that is that being overly pessimistic is likely to mean telling people to work longer than they need to or skip doing things early in their retirement that are meaningful to them.

Congratulations. You kept the clients from one thing they did not want. You also kept them from the life they did want and that they worked their whole life to experience.

This can happen when the focus is on getting a “good” forecast into a bad model.

A model that assumes a stable inflation adjusted spending pattern regardless of what is happening in the world is simply not realistic.  People do not behave that way.

On one hand behavior change adds to the uncertainty but on the other it is precisely why clients can have successful outcomes despite all the uncertainty.

Don’t just ask the software “What if the market returns are weak?” It will give you an ugly answer that you or your clients may interpret as a reason to forego the life they want. It may not have to be that way.