401K Calculators Could be Useless Long Term

401K Calculators And Black Swan Events

A Black Swan Event can completely mess up any retirement 401K calculators results you depend on for retirement. This can result in the complete destruction of your retirement plans.

A quick definition of a “Black Swan” Event is something that happens that is completely unforeseen.

Many people make the claim that the last financial crisis was a Black Swan Event. However Nassim Taleb, the author of, “The Black Swan: The Impact of the Highly Improbable” claims it was easily foreseen as highly probable by many people and was in fact a white swan event,

“You’ve said that this current market crisis isn’t necessarily a black swan event. People did see this coming. It is a white swan, but very few people saw it coming, I guarantee. “

What is completely forgotten it seems to me is, for whom was the financial crash a Black Swan Event? You of course, and for all the other people saving responsibly for their retirement and putting their retirement nest egg in the hands of  professional financial managers.

401K Calculators Didn’t See the Crash Coming?

You never saw the crash coming. How could you? You relied on your financial planner to manager your investments for you. It was their job to manage your retirement nest egg. Every time you went to see them they told you to expect 7-9% average returns as far as the eye could see.

Each year you opened a letter from your fund manager telling you that yet again your returns were positive. You did not get any market assessment, economic forecast,  any hint of a sub-prime crisis, any idea of the effect of incredibly low interest rates causing a massive risk taking bubble.

Nope all was well as far as you were concerned.

Then once a year you might be charged $300 for your yearly one hour financial review consultation and you were out of there and back on your yacht. Isn’t that what happened?

However after you experience your personal Black Swan Event you were not happy. Your confidence in your financial planner was very low. But what could you do, sell and take the losses, or stick it out.

The story always is that in the long term you will get your money back. But wait a minute, you have retired. You are distributing your retirement nest egg not accumulating it.

You are taking money out of your retirement funds to live on. A 4% withdrawal rate means your retirement nest egg is going to have to earn at least that amount plus maybe another 3% for inflation (taxes may also apply) just to maintain your capital.

You revisit your financial planner who ran what was left of your retirement nest egg through his trusty retirement 401K calculator and guess what?

Unfortunately you found you had to get that “meet and greet job” at WalMart if you were to have any hope of replenishing your retirement nest egg and getting back to the retirement life you planned.

If all goes well maybe in two years you can retire again. Here we are 4 years later and you might still be in uniform Sad smile

You see retirement calculators are really a tool for the financial planning industry to promote the idea that they can actually plan your retirement after you retire. They can’t if they have much of your money tied up in risk-based assets like equities.

Calculators may be fine if your money is in bonds or term deposits. But then your financial planner will tell you there is no growth in your retirement funds and you will not be able to retire comfortably.

First rule is make sure you have all the money you need before you retire and therefore don’t need your funds to grow when you are in retirement. All you want is capital preservation. If they can do that whilst you are taking out 4%, inflation is at 3%  and your planner is taking 1% then they are bloody marvellous fund managers.

That makes 8% return in my book and it equates to the long term returns in all the fund manager brochures. But past performance is no blah!blah! blah! So how likely is that if they use the disclaimer as their get out of jail free card?

When I put my money with a fund manager he asked me how much risk I could tolerate and what return I wanted. I told him I didn’t want any risk or return! All I wanted him to do was preserve my capital and any growth was a bonus I might leave to my kids. Smile That will make them happy.

If you cannot plan to retire with all the money you think you will need you are seriously risking your comfortable retirement will be taken from you by a personal financial black swan.

New Types of 401K Calculators

401K Calculators need some different inputs if they are to be really useful in at least trying to anticipate a personal black swan.

For instance they should include options to include:

  • the amount of bank credit in the system and how leveraged the banks are using fractional reserve banking
  • the unemployment rate vs. the inflation rate (Keynesian’s use this seesaw to destroy your wealth)
  • Wage demands and strike actions
  • Government Spending, foreign aid and war spending.
  • CPI with volatile items like oil and food added back
  • GDP broken into Private and Government
  • Ratio of Private to Government Workers
  • Outstanding Retirement Benefits due to Government Employees
  • IMF activity and World Bank Activity – SDR production
  • Growth of the FED Money supply – printing money
  • The Price of Gold, Oil and Food Commodities
  • Bond Trends
  • Balance of Payments and foreign exchange
  • Government Debt and Interest Payments
  • Only allow 30% or less be placed in risk-based assets
  • Place retirement nest egg money in several different institutions
  • Keep up to 2 years cash on hand

OK, it is not exhaustive and I know some of them may be hard to quantify. But that is exactly where your financial planner can earn their money. By considering these things they should be able to advise you on how to protect your retirement savings.

Most 401K calculators are all about you. They need to be about the economy, the markets, the banks, the FED. These are the inputs that will move money and possibly cause you huge losses if they move against you.

The point is we should consider them and find some way to quantify them and put them into the Retirement 401K Calculators to come up with a sort of “Volatility Index for your retirement nest egg”.  Let’s call it your personal volatility index or pVix.

All the things I have listed have far more bearing on your retirement nest egg than what fund you are invested with.

If pVix is high your retirement fund should mostly be in cash or term deposits maybe.

If pVix is low maybe 30% of your money could be in risk-based assets.

The Retirement Calculator should not only tell you how to draw down your retirement nest egg, it should also tell you when you need to take no risk with it.

Preservation, preservation preservation is the key

Your financial planner will tell you to expect a market correction every 5-7 years or so but the market will recover. Retirement 401K Calculators should tell you to go to cash when your pVix is high, wait for your personal Black Swan Event to occur, and then when your pVix is low buy up to 30% of those risk-based assets to preserve your capital and meet your draw-down commitment.

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