Physics may not be your thing, but you’ve probably heard of the uncertainty principle; even if you’re a bit uncertain (sorry) about exactly what it is. Well, in a nutshell (according to Encyclopaedia Britannica), it states that you can’t measure both the position and the velocity of an object exactly. The more accurately to try to pin down one, the more uncertain the other becomes.
Imagine a world without uncertainty
Before scientists discovered the laws of quantum mechanics, they’d assumed that the universe ran like clockwork. If you knew the present accurately enough, you could predict the future precisely.
There’s an analogy in the field of retirement planning. You want to precisely plan your future finances till the end of your life. To do that you need to know exactly:
- How long you’ll live.
- How well your investments will perform.
- What inflation there’ll be.
There are plenty of retirement planning tools that will let you do this. They assume that the future is predictable. They pretend that uncertainty doesn’t exist. So if you invest your money in shares, it assumes it will grow at a steady rate year after year, for example 7%. If your life expectancy is 30 years, say, then it assumes that’s precisely how long your money needs to last. It may also assume that the cost of living will rise by exactly the same amount every year, say 3%.
Yes, it makes the world simpler to ignore uncertainly. But it’s just not the world we actually live in.
Will the cat ever reach retirement?
You’ve probably also heard about Schrödinger’s cat, and that it’s got something to do with the uncertainty principle. Schrödinger asked us to imagine placing a cat in a sealed box together with a killing device triggered by the decay of a radioactive atom. Until we open the box, there’s no way of knowing for sure whether the cat is dead or alive. In fact it’s both, at least in a sense.
Retirement planning is a bit like this. Our money may run out during our lifetime (the cat dies), or it won’t (the cat lives). Until we open the box of our lives by living it till the end, we won’t know for sure. There are a myriad scenarios that might play out. Some may lead to ruin. Others may lead to prosperity. They’re all plausible futures, some more likely than others.
Luckily we don’t need to understand quantum mechanics to take retirement planning uncertainty into account. But it does make things more complicated, requiring more sophisticated tools. Without them we’re fooling ourselves.
Luckily there are techniques that can help us with retirement planning in the face of uncertainty. A widely recognised technique is Monte Carlo Simulation. This runs a large number of randomly generated scenarios, and then statistically analyses the results. This way we can learn how likely our retirement strategy is to succeed.
Our Intelligent Financial Planning Calculator has Monte Carlo Simulation built into it. What makes it unique is that it uses a Genetic Algorithm to optimise your retirement strategy, even in the face of uncertainty. So it’s able to give you the results best meeting your objectives. Navigating uncertainty just got a whole lot easier.