Investing is hard. In hindsight, it is much easier.
Anyone can pull up a chart and say, “I should have just invested in XYZ”.
In reality though, the math of investing is easy. Living through the assumptions of the math is hard.
Most financial plans are modeled using certain assumptions and calculations. While no planning software is perfect, they typically integrate things like:
-Annual returns
-Inflation
-Savings rate
-Life expectancy
-Taxes
-Monte Carlo simulation
These are all useful inputs, but nobody experiences investing as a set of assumptions. Real life does not happen in a smooth line.
Markets don’t return 7% every year. Inflation isn’t constant. Spending changes. Life events happen.
Most importantly, investor behavior and emotions change.
It is one thing to model that a retirement plan can withstand a 20%+ market decline. But living through one is an entirely different experience.
Assumptions and reality will rarely match perfectly in a retirement plan. That does not mean the assumptions are wrong. A spreadsheet can account for market volatility mathematically.
The chart below is a good example of what this looks like in reality. The average fits nicely into a spreadsheet. But the journey to that average does not.
A spreadsheet can tell us if a plan can withstand a large market decline. It can’t tell us if a human being can.
