Retirement: The hardest problem out there
Nobel Prize Winner William Sharpe, one of America’s top economists, has said that retirement income planning is one of the hardest problems to solve. He’s right. With so many variables and concepts to take into account, who am I to think I can actually solve this problem?
It’s because of God’s hand that I’ve been a part of creating JourneyGuide. I don’t claim to have all the answers about retirement, but I do believe this tool will change the way people look at retirement planning and give them more confidence in the future. And for that, I’m proud.
In retirement planning, it’s like we’re trying to figure out the weather forecast every day for the next 30 years. Any predictions we make will be based on assumptions, which are probably on our side. But, we can’t be too careful.
Retirement is fraught with risk – even the best planners in the world cannot account for the volatility of the market of the risks of longevity. Clients need the juice of investment for growth opportunity, but they also need to be sure they won’t run out of money.
For years, we’ve known an annuity can cushion that volatility – it marries growth with stability. But before JourneyGuide, we couldn’t see that impact with our own eyes.
JourneyGuide started because Michael Smith and I like to solve problems – and Tim Ash gave us a whopper of one to solve. As they will tell you, Tim asked us to prove or disprove that annuities work in retirement planning. He’d heard all the experts and read all the research, but he wanted a real analysis.
So, we got to work. Tim hoped for an answer that afternoon, but it was really four weeks or so before we were confident in our answer. Yes, annuities improve the probability of success in retirement – meaning the client won’t run out of money.
Not wanting that knowledge to go to waste, we started applying our analysis to cases. It started very simply, with as few variables as possible. Over time, we used those real cases to include other factors. Michael is a wizard with Excel, but we also looked beyond the calculations. We had to understand the conceptual ideas behind it all.
There were lots of tweaks – we were pounding, beating on the formula to make sure we got things right. It’s hard to get through processes like this without errors … and when they happen, you have to figure out if you were conceptually wrong or if there was a mistake somewhere.
At the end of the day, after all this time, someone could look at our work and say, “Well yeah. That’s easy, right?” The idea of JourneyGuide is simple in theory, but it’s complicated in practice. It’s definitely not easy, but it’s doable.
I like to tell advisors who use the tool, “Without realizing it, you just did really hard math.” You used Monte Carlo simulations, Cholesky decomposition, kurtosis, central limit theorem, path risk, tail risk, and many other difficult concepts … all in one-tenth of one second. Don’t be fooled into thinking it was simple just because the answer pops up on your screen so quickly.
It’s a lot of fun to work on projects like this, but it’s hard. You have to keep looking at what’s behind the numbers. You have to understand the causation of everything you’re doing.
Michael and I continue to look at what we can do to improve upon the tool – what we can do to take the retirement conversation even further. Because, as I said, this is one of the hardest problems to solve. So we won’t stop looking for solutions.
Feel free to reach out to me directly – I’m excited to share JourneyGuide and see its impact on our industry
– Jeff Rocke
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