Pascal’s Wager: The 0.1 Percent Risk
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?”
Categories
Recent Insights
-
Secure Your Legacy: Why Naming a Beneficiary for Your 401(k) Matters
When you participate in a 401(k) plan, you’re taking a significant step toward securing your financial future. But there’s an equally important, often overlooked, aspect of managing your plan: naming a beneficiary. This simple action ensures your loved ones are protected and minimizes complications if the unexpected happens. Here’s why it matters for both you…
-
A Memo from our Chief Investment Officer | March 2025
Market headlines can be overwhelming, especially in times of uncertainty. At Evensky & Katz / Foldes, we understand that economic shifts, policy changes, and market fluctuations can trigger real concerns about your financial future. In the letter below, our Chief Investment Officer, Lane Jones, shares insights on the current market environment, the impact of recent…
-
Ways to Talk Yourself off the Ledge When the Entire Market Seems Like it’s Falling to Pieces
Nobody likes to see their investments decline, especially during retirement when going back to work may not be an option. The first step is not to panic. Staying calm and rational can help you make better decisions. Market volatility is normal, and remember, markets can shift quickly in the other direction. In fact, 70% of…
-
Our Prediction Addiction
If you’ve ever felt the thrill of calling the market right—or the sting of getting it wrong—you’re not alone. As humans, we have an innate desire to predict, to control, and to feel like we’re ahead of the game. But here’s the hard truth: predicting the market is, more often than not, a fool’s errand.…
-
Roth vs. Pre-Tax 401(k): Which Contribution Strategy is Right for You?
When it comes to saving for retirement, one of the most important decisions you’ll make is whether to contribute to a pre-tax or Roth 401(k). Your choice could have a significant impact on your future tax situation, and understanding the difference is key to making the best decision for your financial future. In this post,…