Your Retirement Plan's 10% Failure Rate Isn't What You Think (FQF)

Retirement simulations: what happens in the failure tail (the “10% failure rate”)

Key idea

• If a retirement plan has 90% success, the remaining 10% doesn’t automatically mean “failure is inevitable.”
• That tail can represent years where you’ll likely need to make adjustments, such as:
  • Reducing spending
  • Changing retirement timing
  • Adjusting the withdrawal strategy

Method / demo tool

• The demo uses Projection Lab to run retirement simulations.
• It then inspects the specific years in which the portfolio runs out (not just the overall success rate).

Simulation setup (as described)

• Historical-data simulation
• Example retirement horizon: 50-year retirement period
• Example “optimized plan” success rate: 80%
• Example years highlighted:
  • Starts around 1928/1929
  • Data runs forward “through the present” (with the demo stopping around 1974 due to the long retirement period)

Failure analysis (example “why it failed”)

• The failed path shows money running out around age 70.
• Cited drivers include:
  • Bad stock years
    • -17% in 1948
    • -29% (~30%) in 1949
  • Inflation shock described as a “double whammy”
    • Approximately 9%, 13%, 12%, 9% across multiple years (values transcribed as stated)

Recommendations to address the failure drivers

• Add TIPS (Treasury Inflation-Protected Securities) to:
  • Cover inflation risk
  • Provide assets that don’t fall like stocks
• Build an inflation-protected securities ladder, possibly paired with:
  • Social Security
  • Other guaranteed income sources
• Use “what-if” adjustments in the simulator:
  • Example: reduce expenses from $150,000 to $130,000 (~20% cut)
  • After that change, probability of success rises to ~97%
  • Further tuning (e.g., cutting to $135,000) may target around ~90% success (depending on assumptions)
• If still short, consider behavioral/real-life options:
  • Work one more year
  • Move to a smaller home
  • Consider a state tax strategy (e.g., moving from a high income tax state to a lower/no income tax state)

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Framework: “Failure-tail debugging” via simulation

1. Run a retirement simulation using historical market and inflation sequences.
2. Identify the exact years when the portfolio hits zero.
3. Diagnose the drivers (e.g., stock drawdowns + inflation).
4. Mitigate specifically by:
   • Using TIPS / guaranteed-income components for inflation and basic spending
   • Adjusting spending targets (try discrete cuts and re-simulate)
   • Adjusting retirement timing and/or housing and taxes
5. Re-run the simulator to see how changes improve the probability of success.

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Lump sum vs cost averaging (entry timing for a lump of cash)

Asset mentioned

• VOO (Vanguard S&P 500 ETF)

Scenario

• Investor has $500,000 in cash in escrow.
• Question: invest it in increments versus all at once.
• Example cost-averaging schedule given: $10,000 per week for 1 year (50 weeks).

Presenter’s stance

• It’s impossible to know whether lump sum or cost averaging will outperform over the next 6 months to 2 years.
• Therefore:
  • Choose what you can commit to
  • Avoid changing the plan due to fear after markets move

Research direction cited

• “Research shows that investing the entire amount usually outperforms” (general statement).
• However, because the S&P 500 is “very expensive” by historical standards (as stated), outcomes may differ—so don’t base the decision on prediction alone.

Practical approach suggested

• Decide between:
  • Lump sum now, or
  • A pre-set cost-averaging schedule (e.g., fixed weekly buys)
• Then commit—don’t dynamically alter based on short-term market moves.

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“Anchor” strategy near retirement + cash bucket / basket strategy

Concept: Anchor strategy

• Hold 3–4 years of expenses in cash or bonds when stocks are highly valued.
• The idea is to delay spending/withdrawals from stocks during downturns.

Presenter’s guidance

• First decide the target asset allocation at retirement (stocks, fixed income, and some cash).
• Decide whether to keep allocation steady or adjust during retirement.
• The presenter prefers using one allocation rather than frequently changing it (to reduce decision burden), but still endorses having a plan.

Cash duration heuristic

• Example used: 5% in cash and estimate how many years of expenses it covers (with Social Security/pension reducing required cash).
• Presenter’s preference: keep cash for about 1 year of expenses as a reserve.

Reference to Harold Evensky (basket strategy)

• Harold Evensky is described as a “father” of the basket strategy (as commonly discussed), with a clarification that today’s taught approach may differ.
• Evensky’s version described:
  • Keep a cash reserve (initially 2 years, later reduced to 1 year)
  • Replenish/rebalance quarterly
  • Did not use the cash basket to spend during stock market crashes; instead it maintained stock/bond exposure via rebalancing
• Rationale for reducing from 2 years to 1 year:
  • Clients wanted confidence, but too much cash reduces portfolio efficiency

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Framework: Cash bucket vs percentage rebalancing

• Prefer rebalancing by percentage (simpler) rather than tracking “years for each asset class.”
• Use cash as short-horizon insurance (e.g., ~1 year of expenses).
• If using a basket concept:
  • Focus on replenishing and rebalancing rules
  • Rather than “spending the cash during downturns”

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Where to park near-term spending cash (money market fund + tax note)

Fund mentioned

• Vanguard VMFXX (money market fund)

Yield mentioned

• 3.79%

Intended use

• Storing reserves for retirement expenses and money needed over the next year or so

Operational constraint

• Need a Vanguard account (not available through all brokers, per presenter)

Tax / disclosure details (important)

• The fund may invest in instruments subject to state/local income taxes.
• Example breakdown cited from Vanguard documentation:
  • “Share of ordinary dividends on US government obligations — 66.61%”
• Presenter’s note: this is additional information because state rules vary.

Transparency / disclosure

• Presenter explicitly states they do not own shares of VMFXX.

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Term life insurance: when to cancel (retirement context)

Scenario

• Husband and wife have $250,000 in term life insurance.
• Premium is “a little over $50/month.”

Question posed

• If the mortgage is paid off, do they still need the insurance?

Presenter’s recommendation framework

• Buy only as much insurance as needed—not “a cent more.”
• Term life insurance is mainly for when someone is dependent on your income.
• If no one depends on your income (e.g., retired with savings, or single with no dependents), term life may be unnecessary.

Caution / disclaimer

• Presenter says they can’t tell the viewer what to do; viewers should conduct their own analysis.

Personal example

• Presenter canceled insurance after the mortgage was paid off and they had enough savings for the spouse to live without replacement income.

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Explicit disclosures / disclaimers

• No broad “not financial advice” line appears verbatim in the provided subtitles.
• The presenter does include situation-based limitations, such as:
  • For insurance decisions: “You should do your own analysis to see what is best for your situation.”
• Presenter explicitly states: does not own VMFXX.

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Mentioned assets / tickers / instruments

• VOO (Vanguard S&P 500 ETF)
• TIPS (Treasury Inflation-Protected Securities)
• VMFXX (Vanguard money market fund)
• Social Security (as guaranteed income in planning)
• Cash, bonds (general categories; no other specific tickers given)

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Key numbers highlighted

Retirement success / failure

• Example plan success: 80%
• After expense cut ($150,000 → $130,000): success rises to ~97%
• Further tuning could target around ~90%
• “90% success” framing vs “10% tail” concept

Failure example: drawdowns + inflation

• Stock losses: -17% (1948), -29% (~30%) (1949)
• Inflation: approx 9%, 13%, 12%, 9% (multi-year sequence)
• Retirement simulation: 50-year retirement period
• Money runs out around age 70

Cost averaging example

• Total cash: $500,000
• Example schedule: $10,000/week for 1 year (50 weeks)

Cash reserve fund example

• VMFXX yield: 3.79%

Term life insurance example

• Coverage: $250,000
• Premium: “a little over $50/month”

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Presenters / sources mentioned

• Presenter: “Five Questions on Friday” host (name not provided in subtitles)
• Influential figure referenced: Harold Evensky (credited with influence on basket strategy concepts)
• Tool referenced: Projection Lab (simulation platform)