A financial plan that results in a single number masks the complexity and uncertainty underlying the outcome. Of course, people do want to know how they are doing saving for retirement so what’s the solution?

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Helping Larchmont Families Plan for the Future
Ian A. Post, CFA
Fifth Set Investment Advisors LLC • 2065 Boston Post Road • Suite 200 • Larchmont, NY 10538
Email: ipost@fifthsetinvestment.com • Web: www.fifthsetinvestment.com • Phone: 646-783-9717
• Portfolio Management
• Financial Planning
• Investment Insights
Investment Corner
By Ian A. Post, CFA
IanA.Post,CFA
Lately I’ve been investigating
new financial planning soft-
ware for use at my firm. While
the various solutions have their
pros and cons, every solution had
one feature in common. They all
generated a single number that
purportedly gives the probability1
that the client’s financial plan
will succeed or fail. The software
might generate a result such as
“Tom and Mary Jones, you have
a 58% chance of funding all your
goals.”
What the software providers are
doing is responding to a market-
place that says people want a sim-
ple representation of how they
are doing saving for retirement.
The problem, as Albert Einstein
explained, is that “everything
should be made as simple as
possible, but not simpler”.
A financial plan that results
in a single number masks the
complexity and uncertainty
underlying the outcome.
A recent article in the Financial
Analyst Journal, “It’s Time to
Retire Ruin (Probabilities)” by
Moshe Milevsky2
, delineates the
issues caused by looking at a sin-
gle percentage chance of success
(failure). The issues Milevsky
raises are as follows:
• What percentage of success is
high enough? – i.e. Is a 70%
chance of success good or bad?
• Different plans can have the
same success percentage, so
which one is best?
• We don’t have enough infor-
mation about markets or the
future to make single number
predictions.
• How confident are we in the
underlying calculations?
Of course, people do want to
know how they are doing saving
for retirement so what’s the
solution?
The solution to this problem
is twofold.
First, we must accept the
uncertainty involved when
planning for an event that, for
a forty-year-old, might extend
fifty to sixty years into the future.
Developing precise estimates of
variables ranging from income to
inflation to investment returns,
not to mention typically unpre-
dictable events, such as personal
health issues and macro events
is effectively impossible. While
not a reason to avoid planning
altogether, it is cause to take a
broader view and accept that
there is a wide range of possible
outcomes.
The second step is to develop a
plan that illustrates uncertain-
ty and focuses on a range of
possible financial outcomes. My
conversations with clients will
go something like “given where
you are today and if you contin-
ue on the path you’re on, what’s
a reasonable range3
of possible
retirement (or college) funding
outcomes.” If those outcomes
are generally less than you think
you’ll need, then we can focus
on the levers you can push and
pull in order to adjust the plan,
i.e. save more, spend less, invest
more aggressively4
.
While financial plans that
illustrate uncertainty and raise
awareness of a wide range future
possibilities might be somewhat
less satisfying than single number
explanations, they offer a more
realistic and practical result from
which informed financial deci-
sions can be made.
Fifth Set Investment Advisors LLC is a
registered investment adviser. Infor-
mation presented is for educational
purposes only and does not intend to
make an offer or solicitation for the
sale or purchase of any specific secu-
rities product, service, or investment
strategy. Investments involve risk
and unless otherwise stated, are not
guaranteed. Be sure to first consult
with a qualified financial adviser,
tax professional, or attorney before
implementing any strategy or recom-
mendation discussed herein.
Larchmont resident Ian A. Post, CFA is the Principal of Fifth Set Investment Advisors LLC. Fifth Set is the result of his evolution of thought in regard to conventional investment
management. His experience and education led to research for a smarter approach to portfolio management and financial planning. Prior to Fifth Set, Ian conducted
fundamental equity research at Citigroup, Credit Lyonnais and CIBC Oppenheimer. Ian earned a BS in Engineering and Public Policy from Washington University and an
MBA with concentrations in Finance and Statistics from NYU and is a holder of the Charted Financial Analyst designation and a member of CFA Institute.
1
Many retirement calculators generate a dollar savings goal rather than a probability of meeting a goal. 2
Moshe A. Milevsky is an Associate Professor of Finance at York University, Toronto.
3
Using a method of forecasting called Monte Carlo Simulation. 4
This option can also make things worse.