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Dan Ariely demonstrates with empirical data that some common financial advice questions are silly
A very interesting article. I was really struck by the sad accuracy of one of the responses to the article, with respect to calculating how much retirement income will be needed, and where it's going to come from:
"Fact is, “most people” (a huge and vague group that, in this case, includes me) are unable to change their outflow enough to accumulate even the 60% or 75% they “think” they’ll need, regardless of investment strategy or risk tolerance.
One or two big setbacks–long layoff, buy the wrong house, marry the wrong person, get sick on the wrong insurance plan–and savings/investments sufficient to allow ANY sort of retirement become virtually impossible.
I’ve done all the mainline financial planning, tweaked my estimates, looked at my plans and %ages. When I twisted her arm, my financial planner agreed: “You’re doing everything right, you’re not going to make it, and you need a bigger number on the “income” side.” She didn’t have much to offer there. I suspect few planners would.
I’d really like to see an answer to this that doesn’t include any mention of how I should have started 30 years ago, when I graduated. That’s magical thinking, too, but it’s what most planners and economists keep resorting to."
This woman has really nailed life as it is for most folks.
"Fact is, “most people” (a huge and vague group that, in this case, includes me) are unable to change their outflow enough to accumulate even the 60% or 75% they “think” they’ll need, regardless of investment strategy or risk tolerance."
I have an issue with this comment. The need is independent of the investment strategy. The amount of money I need for shelter, for food, for medial expenses does not depend on the portfolio. Now, I would prefer a fancier shelter, eat better, etc. which qualifies as "wants" but that is something else.
The portfolio risk and survival analysis is involved to answer the question that if the portfolio is sufficient to meet those "needs." for the duration of retirement. If not, either the portfolio needs changes such as the person must accept higher risk and if this is not desired, person should look to delay retirement or will be forced to take downgrade of lifestyle and some of the needs might not be adequately addressed (shortfall risk).
Comments
A very interesting article. I was really struck by the sad accuracy of one of the responses to the article, with respect to calculating how much retirement income will be needed, and where it's going to come from:
"Fact is, “most people” (a huge and vague group that, in this case, includes me) are unable to change their outflow enough to accumulate even the 60% or 75% they “think” they’ll need, regardless of investment strategy or risk tolerance.
One or two big setbacks–long layoff, buy the wrong house, marry the wrong person, get sick on the wrong insurance plan–and savings/investments sufficient to allow ANY sort of retirement become virtually impossible.
I’ve done all the mainline financial planning, tweaked my estimates, looked at my plans and %ages. When I twisted her arm, my financial planner agreed: “You’re doing everything right, you’re not going to make it, and you need a bigger number on the “income” side.” She didn’t have much to offer there. I suspect few planners would.
I’d really like to see an answer to this that doesn’t include any mention of how I should have started 30 years ago, when I graduated. That’s magical thinking, too, but it’s what most planners and economists keep resorting to."
This woman has really nailed life as it is for most folks.
Regards- OJ
I have an issue with this comment. The need is independent of the investment strategy. The amount of money I need for shelter, for food, for medial expenses does not depend on the portfolio. Now, I would prefer a fancier shelter, eat better, etc. which qualifies as "wants" but that is something else.
The portfolio risk and survival analysis is involved to answer the question that if the portfolio is sufficient to meet those "needs." for the duration of retirement. If not, either the portfolio needs changes such as the person must accept higher risk and if this is not desired, person should look to delay retirement or will be forced to take downgrade of lifestyle and some of the needs might not be adequately addressed (shortfall risk).