Is Your Retirement Plan Flawed? With David Blanchett

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[172] – Is your retirement plan deeply flawed?

In this episode, Jeremy Keil speaks with David Blanchett, PhD, CFA, CFP®, Managing Director, Portfolio Manager, and Head of Retirement Research for PGIM DC Solutions, about the shortcomings of modern financial planning. They critique the application of modern portfolio theory and mean-variance optimization, emphasizing the gap between theory and practical outcomes in portfolio management. David advocates for a more personalized retirement planning approach, considering the unique needs of retirees. They discuss the misunderstood role of annuities, the limitations of current financial planning tools, and the necessity for dynamic adjustments based on market performance. They also cover the importance of evolving Monte Carlo models and the need for individualized longevity expectations in planning for retirement.

Jeremy and David go over:

  • The limitations of modern portfolio theory and mean-variance optimization
  • When it’s appropriate to use annuities in retirement planning
  • David’s list of flaws in financial planning and how the process can be improved
  • What’s wrong with Monte Carlo planning 
  • The need for a more nuanced approach to retirement planning
  • And more

Is Your Retirement Plan Flawed?

How do financial planning and retirement planning approaches different differ?

When comparing financial planning and retirement strategies, it’s crucial to understand the nuances that differentiate these approaches. David Blanchett sheds light on the flaws within modern financial planning, often rooted in the misapplication of acclaimed theories, such as modern portfolio theory.

While the core theory emphasizes the value of diversification, the hitch lies in how it’s wielded in practice. It’s inherently challenging to predict the future as there are estimation errors that can lead to misguided choices in portfolio management.

This misalignment between theory and application becomes more apparent when planning for retirement, necessitating a distinct set of portfolios tailored to the unique needs of retirees.

We encourage a shift in mindset, urging consideration of alternative approaches like surplus optimization, specifically designed for those in and around retirement. 

So, whether you’re a few years away or decades from retirement, recognizing the need for a specialized approach can help create a secure financial future.

When is it appropriate to use annuities?

Annuities often evoke strong reactions. If you’re considering annuities for your retirement, here are the facts: Opinions on annuities vary, with the recognition that good and bad products exist, much like in the realm of mutual funds.

The strategic use of annuities comes into play when ensuring essential expenditures are covered in retirement. The concept is simple – having core needs secured, irrespective of your lifespan, can significantly influence spending behaviors during retirement.

Even for those financially well-off, there could be behavioral advantages to converting surplus funds into an annuity, creating a sense of financial security and a predictable income stream for life.

Annuities, and comparable products like Delayed Claiming Social Security, provide an efficient means to guarantee lifetime income, acting as a potential “easy button” for financial security in retirement.

Acknowledging the divided landscape among financial advisors – some favoring annuities extensively while others rarely – suggests a need for a more blended approach. Striking a balance and incorporating annuities judiciously, based on your individual needs and goals, offers a nuanced perspective on their role in crafting a robust retirement strategy.

Does my retirement plan focus too narrowly on binary probabilities of success?

Diving into the intricacies of financial planning, the focus on binary probabilities of success emerges as David’s first of seven flaws in financial planning. It often hinges on Monte Carlo simulations, a popular but potentially limiting method.

In these simulations, a multitude of scenarios is considered, each labeled as a success or failure, based on goal achievement. However, this binary perspective lacks nuance, potentially branding a retirement plan a failure even if it falls short by a minuscule amount.

The problem lies in the absence of a middle ground, neglecting the question of what falling short means for one’s lifestyle. This concern is not against quantification itself, but rather a call for methods that better align with the nuances of individual experiences. Life is a spectrum of outcomes.

We need retirement planning tools that capture the subtleties and recognize the varied shades of financial success beyond a binary lens.

Did my advisor communicate the continuum of outcomes in my retirement plan? / Do I understand the continuum of outcomes in my retirement plan?

The second flaw David identified in financial planning revolves around the failure to communicate the continuum of outcomes in retirement plans.

The concern here is that the current approach often categorizes outcomes in a binary manner – success or failure based on goal achievement. However, this binary perspective neglects the nuanced reality of retirement planning, similar to the first flaw of retirement planning.

For instance, a client aiming for a $100,000 annual income may fall short but still secure 95% of their target through guaranteed income sources like Social Security or annuities. The flaw lies in not articulating what falling short means for one’s lifestyle and not capturing the continuum of outcomes.

We need a more evolved approach, where advisors showcase various scenarios – illustrating not just the successes but also the potential impact on lifestyle if goals aren’t fully met.

Additionally, the paradigm of assuming a consistent spending pattern over 30 years in retirement needs reconsideration.

The landscape of retirement planning tools hasn’t significantly evolved in the last two decades, while technological capabilities have surged ahead. We should start approaching retirement planning differently, leveraging advancements in technology to provide more accurate, personalized, and insightful advice to retirees and advisors alike.

How can retirement planning tools improve?

Improving retirement planning tools involves a shift towards dynamic adjustments, a perspective championed by Income Lab.

Traditional tools often lack the capability to adapt to real-life scenarios, assuming a linear path to success or failure. Income Lab distinguishes itself by incorporating dynamic adjustments into its modeling. This means recognizing that retirees may need to make changes in response to market fluctuations or unexpected events.

For example, if markets perform poorly, a retiree might adjust their spending, and if the trend persists, further adjustments may be necessary. This dynamic modeling acknowledges the realistic nature of retirement, where adjustments and course corrections are not only intuitive but often essential.

Most importantly, it provides retirees and advisors with a more nuanced understanding of potential outcomes. Rather than presenting a static success rate, it offers insights into the range of possibilities and the potential adjustments that may need to be made.

This shift towards dynamic modeling aligns more closely with the complex and evolving nature of retirement, ultimately empowering individuals and their advisors with more realistic and actionable insights.

What is wrong with Monte Carlo planning?

David Blanchett shares he believes that the issue with Monte Carlo planning lies not in the methodology itself but rather in the way humans implement it in financial planning tools.

Monte Carlo is a robust mathematical approach for dealing with randomness. The problem arises when the tools built to execute Monte Carlo simulations lack sophistication in incorporating various factors crucial for retirement planning. These tools often use outdated assumptions, such as static return models and limited randomization of variables.

While Monte Carlo has the potential to consider a multitude of random variables, current tools typically focus on stock and bond returns, neglecting other critical factors like the timing of retirement, life expectancy, inflation, and healthcare expenses.

We want to see an evolution in the design of Monte Carlo tools, emphasizing the need to incorporate a broader array of random variables to better simulate the complex and dynamic nature of retirement planning. We shouldn’t blame Monte Carlo itself but acknowledge the responsibility lies in how tools are constructed and results are interpreted.

Do my longevity expectations match my current lifestyle/situation?

David’s seventh flaw, the flaw in communicating mortality and longevity risk in financial planning, lies in the failure to tailor assumptions to individual health circumstances.

Life expectancy, often misconstrued as a single static number, should be personalized based on health and lifestyle factors. For example, there’s a significant difference in life expectancy between an unhealthy smoker and a healthy non-smoker. This emphasizes the need for advisors to ask pertinent health-related questions to calibrate longevity expectations accurately.

In one of David’s recent research papers, he found that common assumptions in financial planning tools revealed that a staggering 70% of retirement planning ages were set at age 90, with 20% at age 95.

This static approach fails to consider individual variations and leads to a one-size-fits-all scenario. 

We can’t stress the need for calibration enough, encouraging advisors to move away from generic assumptions and adopt a more personalized and nuanced approach to ensure efficient spending in retirement.

It’s necessary to recalibrate our expectations based on individual health and lifestyle factors rather than adhering to uniform assumptions.

How can we better plan for longevity? / What can we do to improve longevity planning?

An excellent resource to figure out your life expectancy based on your personal situation and lifestyle is It not only provides life expectancy averages but also offers a distribution of probabilities, indicating the chances of living to different ages.

Instead of relying on a single life expectancy figure, David Blanchett suggests targeting a 25% chance of outliving it, acknowledging that this figure can change as individuals progress through retirement. He also introduces the concept of a “longevity planning age” as opposed to a fixed life expectancy.

Advisors should consider incorporating a margin of error without being overly conservative. Striking a balance and avoiding extremes is crucial. The goal is to provide a realistic and nuanced understanding of potential longevity to guide more effective planning.

What is the retirement smile?

The concept of the retirement smile refers to the changing patterns of spending during different stages of retirement. The smile is divided into three phases: the Go-go years, the Slow-go years, and the No-go years.

In the Go-go years, individuals might experience an increase in spending as they engage in more activities and adventures early in retirement.

The Slow-go years involve a slowdown in spending growth, possibly even a decline in spending, as individuals become less active but still maintain their lifestyle.

The No-go years, or the final stage, may see an uptick in spending due to increased healthcare costs and potential long-term care needs.

David challenges the common assumption in financial planning tools that individuals will increase their spending by the inflation rate every year in retirement. Instead, he notes that people tend to spend less than inflation, typically 1 or 2% less, as they age. This downward slope represents the initial part of the smile.

The second half of the smile is where things become a little more complex. Some people may run into significant healthcare expenses, like long-term care, leading to an increase in spending in the later stages of retirement. This creates a growing dispersion of outcomes, as not everyone will follow the same spending trajectory. While the average spending for the “median person” keeps declining, the average for all people taken together may increase due to those facing higher healthcare costs.

The retirement smile illustrates the nuanced and varied nature of spending patterns in retirement, acknowledging that individual circumstances and health events contribute to a wide range of financial outcomes.


To learn more about the flaws of retirement planning and how we can improve them, check out the resources below!

If you have any questions, feel free to contact us or our guest, David Blanchett, using the contact information provided below!


Connect With David Blanchett:

Connect With Jeremy Keil:

About Our Guest:

David Blanchett, PhD, CFA, CFP®, is Managing Director, Portfolio Manager, and Head of Retirement Research for PGIM DC Solutions. PGIM is the global investment management business of Prudential Financial, Inc. In this role, he develops solutions to help improve retirement outcomes for investors with a specific focus on defined contribution plans.  He is also responsible for the portfolio management of the PGIM Target Date Funds. Prior to joining PGIM he was the Head of Retirement Research for Morningstar Investment Management LLC and before that the Director of Consulting and Investment Research for the Retirement Plan Consulting Group at Unified Trust Company.



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