Chris Jones looks at determinism in the future of retirement planning. And music legend Tom Jones. Which is not unusual...
As I write, Tom Jones is number one in the album charts aged 80. Whilst this is an impressive achievement, it’s not exactly helpful for the retirement planner.
Sir Tom is still working 20 years after his father (a miner) would have retired. At this age, it would not have been unreasonable to be planning to pay for long-term care; instead, he is paying for an entourage.
Of course, his life is exceptional and exceptions are interesting. In articles, the news, social media or general conversations, nobody wants to hear about the average, the typical or the ordinary. This fascination with exception is not without social consequence.
Whether it’s watching talent shows, pushy dads at kids’ football matches, or the strange world of social media influencers, today we have many more people ‘following their dream’, and more people expecting to lead exceptional lives than can possibly ever achieve them.
Conversely, you can be sure that you’ll hear about the rogue adviser or the failed fund because it’s so unusual as to be newsworthy. Articles reporting normal fund returns, or covering the vast majority of people whose lives were significantly improved by financial advice, are hardly likely to get an editor’s adrenaline flowing.
'At this moment'
This concept of ‘having your moment’ that suddenly guarantees your future is not just more exciting. It’s also a simpler way of thinking about what is to come. It’s easier to imagine that there is a single answer to a problem, a single reason something happens or an immediate and direct cause and effect than it is to consider the complexity of life.
We are all aware of the evils of judging somebody by a single fact or categorisation. In truth, people are a complex manifestation of their circumstances and the choices they make through a complex balancing of incentives and disincentives. Tom Jones is not a great singer because he is Welsh. Neither is his career a product of his destiny.
This is the classical debate between determinism and free will. The harder something is to explain, the more likely we are to put it down to fate or destiny. When something is simpler, we are more likely to attribute it to our own actions.
As retirement or financial planners, we have the opportunity to change people’s circumstances by helping them make better decisions. Our role is to get people to take action. None of us would recommend ‘really wanting it’ or ‘trusting your destiny’ as the foundations of a sensible plan.
We find ourselves talking our clients away from the extremes and exceptions, whether it is the low returns of March 2019/20, the high returns of March 2020/21, the hope that you might be ‘discovered’ or the despair that you could never afford to retire.
With investments, we run a Monte-Carlo simulator of 6.000 possible returns paths of 49 asset classes with 2,400 correlations, from which you can see that there is a typical, average long-term return and also very unlikely (yet still possible) good and bad returns.
We suggest that you plan using the average one, yet in exceptional years this would not make sense if you hadn’t also set out the extreme exceptional possibilities as context. We can easily use our Risk-based indices to see that whilst the good and bad years happen over time, it normally reverts to average. In other words, the destination is quite predictable but the route is not direct or foreseeable.
'I'm growing old'
In this regard investment values are not dissimilar to people’s lives: there are multiple factors at play in a free market, and multiple decisions for individuals with free will. Yet there are ultimately constraints that control the likely eventual outcome.
When you are young, anything and everything can be possible. Our dreams and goals can encompass everything except to be like our parents and grandparents. But in reality, few of us end up owning a beach bar, living on a boat or writing that best-selling novel. As time goes by, goals become more realistic, specific and familiar, and at the same time the options and possibilities narrow.
I believe that this is one of the greatest attributes of a financial planner, because you speak to more and more people of different ages, giving you a greater understanding of how lives are lived, the choices that are made and their consequences than almost any other profession. When helping somebody to plan for the future, this knowledge and experience is invaluable. I would also argue that it is uniquely human, so immune from automation.
We know that a younger client will probably meet someone and settle down, prefer a house with a garden to a flat near the bars, get a better job, prefer a nice hotel to back-packing, need a people carrier rather than a motorbike. We know that they will want to help with their children’s education, think about starting a business, and eventually, perhaps appreciate the convenience of a cruise and the pleasures of a nap.
Eventually, they will probably not want to do too much and need some help with daily living. Some individuals won’t follow this pattern, but when it comes down to it, most people do end up being quite similar to their parents.
What we don’t know is exactly how these things will come about, when, or in what order. Just like investment returns, the destination is quite predictable but the route is not direct or foreseeable. It’s just that if anything there are more factors and variables with people.
So, while we have free will there is some level of determinism, but this is just the probabilistic nature of all the various factors, decisions, incentives and disincentives of the society that we live in. An individual has free will, but the likelihood is that they will exercise it in a way that ends up with them being more similar and more average than they originally aspired to be.
Tom Jones didn’t retire at 60, and today (excuse the pun) that’s not unusual. Most jobs have neither the physical exhaustion or the defined denefits and defined retirement age of miners like his father. The greater freedoms in pensions afforded to us today enable us to exert more free will in our retirement, and as a result, our retirement is no longer pre-determined.
This means that more retirement planning is required and this can no longer be done in a deterministic way. We need to be able to reconcile both the variability of investment values and return paths with the variability of our clients’ lives and choices.
We can do this by embracing the randomness through a Monte-Carlo simulation and the client’s choices through cashflow planning.
We can acknowledge the extremes and exceptions as just that and help our clients to plan for the most likely outcome. And if it turns out that people still consider you to be a Sexbomb in your 80s, just accept that as one of life’s little added bonuses.
Chris Jones is proposition director at Dynamic Planner