Retirement: Three Big Questions

En español | At the peak of the 2008 market meltdown, Mark Wilson got one of those calls every financial planner dreads. On the line was a sobbing 65-year-old retiree, begging him to sell all her investments — stocks, bonds, everything. She was convinced she was going to lose her retirement savings and wind up destitute. Wilson had been receiving a lot of calls like this.

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Wilson, a vice president at a financial planning firm in Newport Beach, California, always tried to reassure his clients that things would get better. But the truth was, he really didn't know. Nobody did in those panic-stricken days. Still, he told the woman that selling everything would be a huge mistake and he wouldn't help: If she wanted to be foolish, she'd have to go it alone.

They argued, and when Wilson hung up, his secretary dashed into his office. "Oh, my God — that was horrible," she said.

"You don't know the half of it," he replied. "That was my mother."

As Wilson's mom learned that day, financial planning is not an exact science. To quote financial historian Peter Bernstein's blunt warning to planners everywhere: "We don't know what's going to happen with anything, ever."

That might not be what you've been led to think about financial planning, particularly when it comes to retirement. Log on to your company's 401(k) home page or poke around any retirement website (including ours!) and you'll usually find a retirement calculator. Some purport to tell you, to the penny, how much you need to save to live happily ever after. What's uncertain about that?

Well, in a word: everything. Your retirement plan is only as good as your answers to three basic questions: How long will you live? How will your investments perform? And how much will you need to live on for the rest of your life? But you don't know the answers to those questions. Nobody does. Behold the dirty little secret of retirement planning.

So if you can't answer these questions and you can't plan without them, what can you do? First, relax — you have options. You can buy insurance against uncertainty. You can build a margin of safety into your assumptions. Most important, you can let go of the notion that there is a single, permanent right answer and accept the need to be flexible. Perfection is the wrong goal. "You know that you're guessing — and you know you're going to be wrong," says Ralph Warner, author of Get a Life: You Don't Need a Million to Retire Well. "The question becomes, ' Which way would you rather be wrong?' Do you want to sacrifice to save a lot now, on the off chance you'll live to be 106? Or do you want to enjoy more now and take your chances later?"

With that puzzle in mind, let's tackle the three questions.

Next: Question 1: How long will you live? >>