Without Considering Preferences A Retirement Strategy Can’t Be Personal
Several of the posts on this blog have talked about the impact of retiring later, saving more, or starting to save earlier. All of these are mathematical calculations, and it is easy to change the input and see how that changes the output. But these mathematical changes really don’t measure what is important to a participant and how important each objective is when compared to other objectives.
Decades of studies have been dedicated to measuring what is important to a person and how important one factor is relative to another. Most of these processes are used in market research to help sell more. Some people may be willing to spend $300 more on a TV with a 6” bigger screen and others may only be willing to spend $200 more so measuring this can help set a price to maximize revenue or profits. As the number of variables increases, it becomes more difficult for an individual to mentally compare them and decide which is more important and by how much. Techniques have been developed to break these decisions into less complex comparisons and then combine that information to quantify the differences for all variables simultaneously.
A retirement calculator forces a participant to change the desired retirement age and income, savings rate, etc. and see if some combination of these changes will support the retirement years financially. Instead of using trial and error hoping to find a combination that is satisfactory why not ask a few simple questions that let the system determine participant priorities, combine that with a range of objectives, check the financial success rate and offer a suggested retirement strategy that is both suitable and satisfactory.
Let’s look at an example of two different participants and how their preferences do make a difference. Both of these participants want to consider the same range of possible retirement goals as follows.
| Variable | Ideal | Acceptable |
| Retirement Age | 62 | 70 |
| Retirement Income | 90% | 75% |
| Savings Rate | 3% | 10% |
| Risk Level | 5% bad year loss | 27% bad year loss |
A description of these two participants might read as follows.
– Participant 1 is willing to save more and take more risk in order to retire sooner with more income
– Participant 2 is willing to work longer and have less income in order to take less risk and save less
Quantifying these differences and the resulting suggested strategies would look like this. Higher importance numbers indicate achieving the ideal level is more important and both of these strategies have the same chance of funding the retirement years until death.
| Variable | Participant 1 | Participant 2 | ||
| Importance | Strategy | Importance | Strategy | |
| Ret. Age (early) | 40 | 67 | 22 | 69 |
| Ret. Income (high) | 32 | 90% | 6 | 78% |
| Savings Rate (low) | 6 | 10% | 32 | 3% |
| Risk Level – (low bad year loss) | 22 | (13%) | 40 | (5%) |
It is easy to see that the suggestions for the first participant are closer to the ideal objective of the more important goals and the suggestions for the second participant align with the different set of priorities. It is important to think this way so a participant has a suggested strategy that aligns with personal preferences, but without software that can quantify and incorporate the preferences simultaneously finding the best solution for a participant can be an extremely frustrating or even impossible task. These preferences do make a difference and without considering them any guidance and advice recommendations are a pure guess as to whether or not they match a participant’s real personal goals and less likely to be acted on now and followed in future years.
