‘Probability of Success’ Doesn’t Mean What Your Clients Think It Means

When advisors talk about the “success” of a retirement income plan, clients naturally think it means something like “living a great life.” After all, surveys tell us that retirees’ top goal is having a high quality of life.

In other words, retirees tend to focus on using their resources to fund as comfortable and fulfilling a life as possible, including experiences with spouses, friends, children and grandchildren. While this goal includes not running out of money or being a burden on children, leaving money behind after death consistently ranks as a very low priority among retirees.

When I ask advisors what their goal is when working with retirement clients, they consistently express similar aspirations: helping clients live the best life they can. “Success” here doesn’t mean working magic so everyone lives in a fantasy land where anything is possible, but rather helping people live the best life they can in the financial world they happen to be living through.

Unfortunately, one of the most common measures used in retirement planning — the “probability of success” score — drives clients toward underspending and leaving money behind at death, while also driving up anxiety. That’s not exactly “living the best life you can.”

The problem is that the word “success” in this score means something very different from what clients understand it to mean. Fixing this problem will require abandoning “probability of success” in retirement planning.

Dropping the ‘Scrooge Score’

A plan with a 100% probability of success does not have a 100% chance of providing the best life possible. Instead, it means that in every single simulated scenario in a Monte Carlo analysis the clients could actually spend more and still hit all of their other goals, including not running out of money.

In other words, that 100% score means there is a 100% chance that this plan is underspending the clients’ resources. The word “success” here doesn’t mean “winning at the game of retirement.” It means underspending,

It might be more accurate to call “probability of success” the “Scrooge score,” after the famously miserly Ebenezer Scrooge in Charles Dickens’ “A Christmas Carol.”

Clients, of course, do not know or understand this. Why would they? After all, “success” already has a meaning in the real world, and it’s not “underspending.” And worse, when clients see a success score they quickly do the math and produce a probability of failure.

Any probability of failure greater than 0% can lead to anxiety. Naturally, clients want to maximize chances of success and minimize chance of failure. Who wouldn’t?

Advisors who help clients plan for retirement aren’t hoping to maximize underspending and the “Scrooge score.” They are trying to balance the two main risks of retirement: the risk of overspending and the risk of underspending.

Overspending is the risk of depleting resources too quickly. Underspending is the reverse. It is the risk of being so frugal that clients don’t meet their goals, and instead find themselves in the regret zone.

The “regret zone” is the point in life when retirees look back and realize that they skipped experiences they could have afforded — trips with grandkids while they’re still young or bucket list items with a spouse or with friends — and they’ll never be able to turn back the clock.

It’s the point when clients’ resources so outstrip their goals that they realize that, in a sense, they worked extra years “for free” since they’ll never be able to use those extra resources in their lifetime.

While lack of resources for retirement is indeed a problem for a large part of American society, underspending and regret are major problems for those who do have resources for retirement but aren’t using them optimally.

A Better Framework

Because “probability of success” is really “probability of underspending,” it drives people toward the regret zone. But just understanding this fact doesn’t solve the problem. As long as probability of success has a role in retirement planning, it can’t help but distort the vision of clients and even advisors.

Try convincing your clients that 80% success is better than 100%! That’s an impossible trick because the word success already has a meaning.

The solution is to jettison probability of success from retirement planning and adopt a more accurate and effective vocabulary and set of tools. As with so many things in life, retirement planning is about finding an appropriate balance of risk and reward.

Here advisors can take a page out of their investment advice playbook. Investment management is not solely about avoiding loss. If it were, all clients would have 100% cash portfolios. It’s about balancing risk of loss with the opportunities and rewards of investment returns, within the constraints of a client’s risk tolerance.

Retirement income planning is similar. It’s not about minimizing the risk of overspending and maximizing the risk of underspending. Instead, it’s about finding a reasonable spending capacity for clients that neither over-taxes their resources (overspending) nor vastly underutilizes them (underspending).

This work involves balancing the client’s goals and aspirations with the particular risks of that client’s circumstances (investment risk, inflation risk, mortality risk, etc.) and the client’s risk tolerance. While different retirees will have different preferences, it will be rare to find a client who prefers to maximize the risk of underspending.

Retirement Isn’t Binary

Another reason to abandon success/failure talk is that retirees don’t actually “fail” in retirement — they adjust. Talk of “failure” sets the wrong expectation and raises unnecessary client anxiety. In other words, probability of success metrics lead many clients to underspend — and to feel worried while doing so.

Retirement planning that rejects success/failure framing can help clients understand that a realistic retirement journey involves not failure, but adjustments.

Advisors can help clients plan for those adjustments by establishing a “spend more” guardrail that tells clients when their risk of underspending and regret is too high, and so they can afford to live a little and spend more.

It also means setting a “spend less” guardrail that tells clients when their risk of overspending is too high, so they should find a way to tighten the belt or adjust their goals to bring that risk down.

You can think of these spending guardrails as a bit like a thermostat with both a furnace and an air conditioner attached. If it gets too cold, it’s time to turn on the furnace and heat things up a bit. No reason to suffer in a freezing house (time to spend a bit more and avoid regret)!

If things get too hot, it’s time to cool things down (spend less and take the strain off retirement resources). If it’s neither too hot nor too cold, no need to make any changes.

Words matter, and the use of the word “success” in retirement planning is getting between retirees and their goals. Eliminating probability of success from retirement planning can help advisors deliver on client goals and avoid regret by including reward in the conversation, not just risk.