Are You Lucky or Good?

ByChris Mamula Hours Categories Retirement Decision
Comments 20 Comments
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In a recent post, I focused on many people’s desire for a 100% chance of not running out of money in retirement. The way calculators define retirement “success,” i.e. not running out of money regardless of how much you have at the end of your life, reinforces this notion.

ski touring approach

This ignores the counter risk of running out of life before running out of money. It often results in substantial over-saving/underspending. 

I got a lot of positive feedback on that idea. As a writer that positive feedback feels good. However, I want to be careful not to oversimplify and create an echo chamber. 

As much as I desire simplicity, retirement calculations are inherently complex. Outcomes are dominated by variables that are unknowable and largely out of our control. They include investment returns, interest rates, inflation, your lifespan, and personal health (and thus health care spending), and potential changes in the law that could impact taxes, Social Security, and health insurance.

Many of the positive commenters who praised the idea of not being overly conservative cited their personal retirement decision and spending in the past 10-15 years. The rest of us have been saving and investing during that time. We’ve all experienced incredibly favorable market conditions.

So, it is worth considering whether we’ve made good decisions or whether we’ve just been lucky to have such positive outcomes. If you are assessing your own retirement readiness, it is worth considering how heavily to weigh the input of those who recently preceded you.

Evaluating Uncertain Decisions

This winter I had one of my best days ever in the mountains, backcountry skiing with three friends. We put the trip on our calendars weeks in advance with no way of knowing the forthcoming conditions.

Backcountry ski run

A few days out, the avalanche report didn’t look promising. We had a big storm mid-week. High winds were forecasted to follow the storm. I watched avalanche reports closely and with concern.

We decided to at least ski in about 3 miles to a friend’s cabin on Saturday. After digging everything out, we built a big fire and shared an amazing meal. On Sunday, we woke early to a beautiful bluebird sky and a favorable avalanche report. The snowpack stabilized considerably over the prior two days.

We got out early and traversed in about another half mile before climbing several thousand feet to an isolated peak. We continued to assess the situation as we approached and climbed. Eventually, we arrived at the summit with untouched snow as far as the eye could see.

We had an amazing ski run through knee-deep powder. Then we skinned back up for another run before deciding to call it a day, an incredible one at that. Even so, I questioned our decision making. 

  • Were we lucky or good?
  • If the avalanche report or our observations weren’t favorable, would we have been smart and turned back? Or would we have forged ahead given our sunk costs of time and effort applied, plus the appeal of that deep untouched snow under a sunny clear sky?

This kind of post hoc analysis is common among my outdoor mentors. It’s something I do after each day out in the mountains.

Post Hoc Analysis

This type of analysis is not exclusive to mountaineers, climbers, and other outdoor adventurers. Poker players are another group that frequently have to make consequential decisions in the face of uncertainty.

Professional poker player Annie Duke has written extensively about evaluating decisions made in such circumstances in an effort to improve future decision making. She points out that we all have biases that tend to color our evaluations, whether of our own decisions or those of others.

She uses the term “resulting” to describe the way most people analyze decisions based on outcomes. As Duke describes this process we tend to think if we had a desirable result it means we made a good decision. To the contrary, if we didn’t have the outcome we desired it is often attributed to bad luck. 

This process leads to a lack of learning and thus not making better decisions moving forward. Instead, she recommends assessing whether you made a quality decision based on the probability and consequences of a particular outcome given the information available at the time the decision was made.

Are You Resulting?

When I interact with readers and advise clients, I sense there is a lot of resulting going on among investors and retirees right now. Many people think they are better investors than they probably are. They don’t seem to fully understand the risks of different investments and the role luck has played on recent investment returns and retirement outcomes.

A Good Year or a Sustainable Strategy?

Here is one comment I recently received. “I spent $130K last year and my nest egg is only down $25K…. I think I’ll be okay. I continue to be data-driven and not fall prey to fear about market crashes, health-care costs, and all the things I’m constantly told might ruin or kill me.”

This feels like resulting. Last year, the US total market was up 26%. If you included international stocks in your portfolio, they were up about 15.5.%. Total bond funds returned nearly 6%. Speculative investments did well. Gold was up about 13% while Bitcoin more than doubled in price. After an extended period of low interest rates, even cash again provided a significant return. 

Was this individual lucky or good? We don’t have enough information based on what was shared to know. There are things we do know.

It was hard not to make money in 2023. Seeing a portfolio go down in value last year would mean spending at a relatively high rate that is highly unlikely to be sustainable for long periods of time.

That may be appropriate for the individual writing the comment depending on their specific circumstances. It is likely not sustainable for most people reading this.

A Lucky Decade or a Repeatable Result?

Another reader recently wrote the following. “Seriously, my only regret with retiring at 58 was why I didn’t do it earlier?…. We do not live frugally or frivolously, but we have much more coming in than we spend…. Yes I had more financial concerns when I was 58 than I do now at 68.”

I don’t know the specifics of this individual. Again, this feels like resulting. Ten years ago was 2014. I ran a few backtests on Portfolio Visualizer.

Over the past decade, a 60% stock/ 40% bond portfolio could have sustained a 4% initial withdrawal adjusted for inflation and still grown by 3.95% annually (1.13% when adjusted for inflation). A $1 million portfolio would have grown to nearly $1.5 million ($1.12 million inflation adjusted).

A 100% allocation to US stocks would have done much better. Even after taking a 4% annual withdrawal, that portfolio would have grown by 8.13% annually (5.20% adjusted for inflation). A $1 million portfolio would have grown to nearly $2.2 million ($1.66 million inflation adjusted).

If you retired at 58 and a decade later had a larger portfolio than you started with while also having Social Security benefits coming online, you should indeed feel very good.

But was that a result of good planning and investing? Or was it largely good luck? We don’t have enough information to know for this particular individual.

Testing Different Periods

We do know these same portfolio and drawdown scenarios in the previous decade, 2004-2013, were generally OK, but not as favorable for either the balanced or stock portfolio when compared to the most recent decade. 

Switching the start and end dates to 2000-2009 paints a very different picture for any portfolio with stocks. However, more bond heavy portfolios held up better.

I encourage you to do your own backtests. Use tools like those provided at Portfolio Visualizer or Portfolio Charts.

Consider longer time frames, different time periods, and a variety of asset allocations. Observe the role that luck plays and how differently the same strategy can play out under different circumstances.

Two Things Can Be True

It is true that many natural savers and planners (i.e. many if not most of you reading this blog) tend to be conservative, sometimes to a fault. Retirement calculators tend to reinforce that conservatism. 

Any outcome where you outlive your money is a “failure,” even if you’re projected to run out of money after you are likely to have taken your last breath. Any outcome where your money lasts longer than your life is a “success.” This is true if you die with $1 or $10 million.

Clearly there is a need for nuance.

However, it would be equally faulty to look at other recent retirees, assume you can just do as they did, and throw caution to the wind. Your results may be far different.

This gray area in between these extremes is where good planning can happen if you have a solid decision making framework. Do you?

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20 Comments

  1. We retired back in Jan ’08 with $1.51M. Over the last 16+ years we have spent ~$1.9M, and yet, as of the end of last month (April) our portfolio is north of $1.89M. I’d say we’re doing pretty good. Even bought a couple of cars (for cash) during that time frame. Oh, and a couple of houses, but one if them has a VA mortgage of $270k at 2.75% (in Lead, SD). The other one we paid cash ($180K in Mexico).
    https://www.dropbox.com/scl/fi/koyi2tomz4lwh8bquq1mj/PortfolioProgress-2024-03-31.jpg?rlkey=29jf84p6gcxszvrmpl2ie2aie&dl=0

    1. J.C.,

      I don’t know if you noticed, but I linked your case study where we discussed the role of luck b/c I loved that conversation, where we discussed the role of luck. You are an example of someone who had horrible luck early on (though you have to admit you’ve had a lot of luck in the markets since as well as timing that 2.75% mortgage pretty perfectly). I appreciate you sharing your story so openly.

      Cheers!
      Chris

  2. Outstanding post, Chris! Totally agree with your conclusion about avoiding resulting and finding balance in one’s retirement planning approach. Resulting is particularly dangerous since there’s such a strong belief to validate our own decisions and believe we’re the makers of our own success!

    The thing I’ve been thinking a lot about lately with respect to the various calculators is the probability of “failure” vs. the significance or degree of the failure. For example, when “failure” is defined, as you mentioned, without consideration of how bad the failure would be, you end up with conclusions like “retirees should have very high stocks allocations”. Such an allocation reduces the % “failure rate” (i.e. the chance of dying at age 90-100 without a dollar to your name) but makes each failure more potentially catastrophic (i.e. running out of money at 70).

    There are plenty of other offshoot avenues to that thought process as well, like just how much would I really need to adjust my spending (or earn a little side income, or whatever) to avoid failure? A few hundred dollars of adjustment vs. many thousands of dollars of adjustment? Do I have lots of silly discretionary spend anyway that’s easy to crop off? Those kinds of things. The degree of failure matters as much as the probability.

    1. Jeremy,

      Thanks for taking the time to chime in. You make some excellent points!

      Cheers!
      Chris

  3. Its MUCH better to be lucky than good.
    Unless Providence shines my best intentions and efforts are for naught.
    Retired 58 March 1st 2020.
    World made no sense. Good news was bad and vice versa.
    Didn’t matter.
    A reed in the wind.
    SWAN.

    1. JT,

      I don’t disagree that I gladly accept good luck with gratitude whenever and wherever it presents itself in my life. Unfortunately, we don’t get to choose the circumstances that may present themselves, so relying on luck is probably not the best strategy. 🙂

      Cheers!
      Chris

  4. Stay Humble. Stay diligent. Great things to remember when times are good. Defining and measuring success or failure with 20, 30, 40-year plans. That’s really tricky and rarely discussed. Here’s a potential topic for a future post. With the complexity of defining success/failure, maybe flexible withdrawal strategies might become more fashionable. A simple 4% against your net worth guarantees success of not running out of money but you could see big fluctuations in yearly incomes. However, you probably have a balanced portfolio, may have a paid off house or cars, social security, pensions, side hustle, etc. that buffer those fluctuations. The calculators are cool because of the precision but life is much messier. The last item that Jeremy mentioned above is how calculators change your investment strategy. Is that good or bad? Depends on your definition.

    1. Thanks for reading and taking the time to leave such a thoughtful comment dap. Yes, I plan to continue to explore this topic in more detail moving forward, including the topics you mention.

      Best wishes,
      Chris

  5. It seems to me that your conclusion somewhat belies your title, i.e., the notion of “nuance” vs. “lucky OR good,” as if it’s a binary thing. I think that the “nuance” would suggest that it’s often a combination, kind of like, “you can’t win the lottery if you never play.” The examples given are about people that have done an above median job of saving, albeit, it seems that the first example is kind of on a tightrope because they did well last year. If I back out their spend and gain, I get that their portfolio is well less than $1 million, so $130k spend rate seems crazy aggressive, unless they plan on drastically cutting down in the near future.

    My assessment of my personal experience is that it’s a combination of good and lucky as well; I saved a ton and didn’t make too many bad decisions, and some bad decisions eventually became good, like buying nVidia in 2005, letting it languish for over a decade, and now, it’s the star performer, while my other stock decisions were categorically bad, like Cienna, etal. But, I couldn’t really get to compare/contrast my personal good/lucky without having a nest egg at all; or, I guess, if it were too small, I’d chalk it up to bad luck. But, my combination of good/lucky has resulted in a potentially comfortable retirement, albeit, one will never know for sure until the end of the book.

    1. kara,

      You make excellent points. Most decisions involve some degree of luck. In addition, our outcomes are the result of the sum of our decisions, rarely just one.

      Thanks for reading and taking the time to add to the conversation!
      Chris

  6. My greatest fear was retiring just when a market crash occurred, just when I needed to start spending down my assets. So I did a “pre-mortem” exercise whereby I listed all the bad things I thought might trigger a market crash that could sink my retirement prospects, and then formulated a plan to mitigate those financial impacts. A few years later I retired and took a lump sum pension that I chose to keep in cash (in addition to my fully invested 401k) fearing that 12 years into the latest bull run a crash was long overdue. A year later the Covid global pandemic hit hard (NOT on my pre-mortem list!) and the ensuing recession was on. While everybody else was panicking, I slept like a baby sitting on what everybody wanted – a big pile of cash just waiting for the bottom to invest, which I hit within 7 days. Was I smart or lucky? Neither! As often happens, the year leading up to the crash was a banner year for stocks with the S&P 500 up 19%, as I sat on the sidelines with my pension money making nothing in cash. As it turned out, because the market recovery was “V” shaped (rather than a K or U or W or any other letter in the alphabet), two months after I invested it all, my total financial outcome was identical to that of just investing my pension money on day one of my retirement. Although the financial outcome of the two choices was the same, I think holding in cash was the right choice for me. Had I invested it all when I first retired, I would have been an emotional wreck watching my critically needed assets race to the bottom in the Spring of 2020.

    1. Jim,

      Thanks for sharing your experience. Your story shows that even with careful planning, you can’t know the future (who would have predicted the pandemic 3-6 months ahead of time, and who would have predicted the positive market outcomes by the end of 2020 in March when the market was being paused several times a week due to massive volatility, barrels of oil actually went negative, we had the fastest ever top to bear market, and where talk of a depression was common and seemed reasonable?)

      Best wishes,
      Chris

  7. About that ski trip and the possibility of avalanches, you might want to watch a short video on Youtube, “Solving for Z” who experienced this. He no longer works as a guide in the Grand Tetons. . .

  8. Love this article, but it also scares me a bit because I really don’t 100% know if my success was largely due to luck. Over the past 25 years we consistently invested and maxed out contributions. I feel that tactic of a high savings rate was key to our success, but I also acknowledge that our earlier accumulation years, 1995-2009, resulted in purchasing equities at a low cost (lucky). Then another decade of solid returns right up to my early retirement (lucky again). The balance between risk, volatility and return is honestly hard to balance. The shift from accumulation to capital preservation is a hard one. I can handle volatility, but the size of volatility balance swings is a whole different ballgame now vs even 10 yrs ago.

    1. Wade,

      Luck plays a part in all of our outcomes. I don’t know how productive it is to try to parse out the % of your outcome attributable to luck. More importantly is to acknowledge that luck does play a role and to understand the things you can control and then take action to control them.

      Cheers!
      Chris

  9. I think smart investing is all about resulting. It just isn’t based on the statistically irrelevant results that one person, me, has experienced. Its about historical results of all investors studied over a long time period. Basing decisions on past results is fine, as long as the data set is large enough. But personal experience is not enough to be statistically valid. But I’m an engineer and I’ve been trained to think that way, which has been a help in making fact based investing decisions. Great content as usual Chris!

    1. Steveark,

      Thanks for the kind words Steveark. I agree with what you write, but that is not resulting as defined by Duke. Instead, it is looking at your own results and judging whether you made a good or bad decision based on your outcome, ignoring the role of luck and chance and the potential alternate consequences if things would have played out differently.

      Cheers!
      Chris

  10. The US has been in a long-term bull market since 1982; it would have been difficult not to make money over the past 40 years. I’ll take luck.

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