A Primer On Minimizing Uncertainty In Retirement Planning

Successful retirement planning requires intelligent investing decisions, but that’s just one of several critical factors for managing your assets after you stop working, reminds Moshe Milevsky in his new book The 7 Most Important Equations for Your Retirement: The Fascinating People and Ideas Behind Planning Your Retirement Income. “It’s time to have some conversations about retirement income planning, also known as de-accumulation planning,” he writes. “The stories in this book should lead you into those conversations.”

It’s also time to start doing the math. Milevsky, a professor at York University who’s written extensively on retirement planning, takes the reader on a brief but revealing tour through seven equations that he argues (persuasively) that are essential for answering such questions as: How long will my nest egg hold out? How long is my retirement likely to last? How should I structure my spending plans in retirement? What is the probability that my retirement plan is sustainable?
Perhaps the main problem in financial planning is that many individuals (and perhaps some financial planners) deal with these questions in an ad-hoc, heuristic fashion. But as Milevsky explains, economists and mathematicians through the centuries have developed quantitative solutions. Definitive answers don’t exist in economics, at least not compared with physics or engineering. But as this useful book shows—simply and succinctly—there are powerful methodologies for removing quite a bit of the mystery that normally weighs on retirement planning choices.
Milevsky advises from the start that he’s not offering a “how-to” book, at least not in the traditional sense. Rather, The 7 Most Important Equations For Your Retirement outlines the frameworks, the concepts for thinking about how to answer fundamental questions—questions that are at the core for determining whether your retirement will be a success or a flop. The book, he writes,

is a narrative involving seven people, their discoveries and the conceptual innovations that made it possible for you to stop working and enjoy the money you have accumulated, one day. These protagonists–or scientific heroes–didn’t achieve their breakthroughs while hunched over a laboratory workbench, peering through a microscope or treking through jungles. They made their discoveries sitting in front of a blank sheet of paper, but while thinking very carefully about life and money.

In some chapters, Milevsky interprets an equation’s structure in a modern formulation if its creator had lived in recent history. For example, Leonardo Fibonacci’s 800-year-old writings that form the basis of present value analysis don’t offer equations per se. Instead, Milevsky interpolates for us, distilling the essence of the concept into a tidy formula.
In other cases, the equations were developed by the original author and survive intact for our review. Chapter 5, for instance, focuses on Paul Samuelson’s simple but elegant formula for deciding how much of your portfolio (or financial capital overall) to allocate to stocks.
The seven equations in this book can’t guarantee success, a caveat that applies to all quantitative efforts for modeling uncertainty about the future in matters of economics and finance. The old problem of garbage-in-garbage-out applies. If we had full clarity about, say, the path of interest rates or market volatility over the next decade, our ability to model the future would improve considerably. But mere mortals must suffer a certain amount of darkness when it comes to thinking ahead.
That said, some guesstimates are better than others. Milevsky’s book lays out what is arguably the foundation for analytically evaluating your retirement future in a thoughtful way, based on the assumptions you provide. The resulting answers are only as good as the estimates you plug in. But with a bit of effort, you can achieve a lot with a spreadsheet and this book.
Milevsky has done us all a great service by condensing and interpreting these seven mathematical concepts into a short, practical-minded overview. The book has lots of competition, of course, but rarely has so much been packed into so few pages and made so accessible. He evaluates the powers of each equation individually and collectively in terms of their value as tools for thinking about retirement planning decisions. Developing intuition about the future is still hard, but this primer shows us that some (most) of the surprises that harass retirement planning can be easily minimized with some basic mathematical modeling.
After reading this book, you’ll never think of retirement finance in quite the same way. That’s progress for most of us, given how carelessly most folks plan for their financial lives after they retire. There’s more to retirement planning than seven equations, of course, as Milevsky admits. But rather than quibble if the true number of equations is eight or 12, of if your list differs, the more-pressing task is to start working on developing robust inputs for the formulas outlined in this book. Retirement is coming for all us, ready or not.