Playing Russian roulette with a thousand-chamber gun might not seem so risky until you consider the consequence of that 0.1 percent risk.

I’ve been working with Linda, my client, for the last hour, entering data into MoneyGuide, our planning program. We’re now discussing the plan’s time horizon—how long her nest egg needs to last so she can keep groceries on the table.

“Linda,” I asked her, “one of the major guesses we need to make is how long you will need money.” (That’s my tactful way of asking what age she thinks she’ll die.)

Years ago, we used a standard actuarial table to estimate how long someone might live. Unfortunately, as a thoughtful friend pointed out, that means you’d have a 50 percent chance of outliving your nest egg, so today, we use age that, based on your current health, your family’s health history, and if you are or are not a smoker, represents a 30 percent chance of your reaching that age. (Chapter 15, Life Timing. What Lynn Hopewell Teach Us?”)  

“Linda,” I continued, “based on your current health and your family health history, we should consider using age ninety-three for planning.”

“Harold, you must be kidding. I’ll never make it to ninety-three! Let’s use eighty-five.”

“Sounds like a nice number. How did you decide on eighty-five?”

“Well, actually, no particular calculation. It just seems like a reasonable age to use, and I want to be reasonable in my planning.”

“Tell me, Linda, are you familiar with Pascal’s wager?”

“Pascal’s what?”

“Pascal’s wager is a philosophical construct devised by the seventeenth-century mathematician Blaise Pascal. Here’s my version: If you knew for certain there was only a 10 percent chance that God exists, you would have two ways to live your life: You could conclude the probability of God’s existence was so low you’d elect to ignore morals and ethics and live a totally outrageous life. If, when you died, it turned out that there really is no God, hence no consequences for your immoral life, you lucked out. Of course, if, when you died, you discovered God was not a myth, and you found yourself chest high in fire and brimstone, where you’d be roasting for eternity, you might not be very pleased with your choice. On the other hand, suppose you decided that, even with the low odds, you would live a moral and ethical life. If, when you died, you discovered there is no God, you would still have lived a comfortable life. If there is a God and you’re rewarded in heaven for your exemplary life, you will have won the eternal lottery.”

“So, what’s this got to do with retirement planning?”

The answer is everything! All too often, in planning, we get caught up with the power of probability. Live until ninety-three? Possible but not likely, so I want to make plans based on living until the age of eighty-five. Based on probabilities, that’s not an unreasonable response. However, as Pascal taught us, that conclusion is missing an important half of the equation, namely, the consequences. Often the terrible negative consequence of coming out on the short side of the probability overwhelms the low probability.

Let’s suppose Linda does live only until age eighty-five. That means she can spend more between now and then because her money doesn’t have to last for another seven years. Good outcome.

Suppose she lives well beyond eighty-five. If we use eighty-five as a planning age, that means by eighty-six, if her plan works out as expected, her nest egg will be approaching $0! What are the consequences of living another seven years supported solely by her Social Security income? 

That means reducing her standard of living by about two-thirds, which may not be on a par with fire and brimstone forever, but it’s high on the quality-of-life disaster scale. The moral? Don’t just consider probabilities when planning—consider the consequences.

“Still want to plan only to eighty-five, Linda?”

Hello Harold is available for free download on Amazon.com.