Most retirement planning, including the conversations we have with our clients, is centered around the hopes and dreams of the retirees. Thinking about the new chapter and the excitement it brings. It could be traveling, becoming a babysitter to the grandkids, or just stepping away from a job that had been needing to be stepped away from all these years.

Retirees and non-retirees alike need optimistic ventures to strive for. But to quote the infamous Rocky Balboa, “life ain’t all sunshine and rainbows.” Retirement is the same way.

Instead of focusing on the good, it’s also not a bad idea to picture what could go wrong. Play out a retirement that has gone off the rails and you’d define as a failure.

This is called a failure premortem.

Admittedly, I stole this idea from James Clear (who also steals this idea from some other smart folks), to see what we can do to avoid failure. He refers to it as inversion, but either way, the exercise is worth completing.

For retirement, this technique can be remarkably revealing. I think it’s a practice worth using for nearly any venture you may want to take on, but we can walk through what an example would look like for someone who is stepping into retirement.

Phase 1: Imagine the Worst-Case Scenario

Start by fast-forwarding to the future. It’s 20 years into your retirement. The plan has failed. Perhaps not catastrophically, but failed in one of the common ways retirement plans tend to fail.

There are three main failure stories most retirees fall into. Perhaps you may envision one of these three scenarios being your retirement failure, or perhaps you may have another.

Failure Story #1: Running out of money.

You’re 85 years old. You’ve outlived your portfolio due to poor money management. Social Security is keeping you afloat, but barely. Retirees who are facing this are in more of a survival mode than enjoyment mode, and an unexpected expense, no matter the size, brings anxiety.

Failure Story #2: You were forced to take a significant pay cut.

You retired at 65 with a plan to spend $8,000 per month. By age 72, you’re spending $6,000 per month. A sudden market correction and mistimed withdrawals brought about a different lifestyle entirely.

The retirement you envisioned is not the reality. You still have assets, but you’re not living the life you imagined either.

Failure Story #3: You left millions worth of experience and enjoyment on the table.

You died at 88 with a portfolio worth $3 million more than you ever needed.

Your kids are doing fine financially. They may not have been when you were 65, but they’re established now. And you’re leaving them assets they do not need.

You spent your retirement years denying yourself experiences you could have afforded because you were afraid of running out.

While some would say this is the most desirable outcome of the three, others would also say it’s the saddest.

Now ask yourself: which of these is most likely to happen to me?

Phase 2: Identify the “How” – What Mistakes Caused This?

Once you’ve imagined the failure, work backward. Ask yourself: “What did I do to cause this?”

Here are some common ones that may have caused it:

“What Got You Here Will Get You There”

We’ve made several references to this one before, but the discipline of growing one’s wealth is an incredibly important trait.

Most retirees who have substantial assets, enough to retire, have lived well below their means for years, worked hard, saved and risked their hard earned dollars, and now find themselves ready to live off the assets.

But the discipline of saving is now replaced with the art of spending and enjoying. These are two different mindsets. The ones who do best with this are able to keep themselves in line with a new investment strategy, a new spending strategy, and build a life that is in line with their finances.

The ones who fail in this don’t grasp the idea that the lifestyle shift will be dramatic enough to cause a whole new way of thinking.

The “Cookie-Cutter” Trap

The opposite mistake is just as damaging.

Many retirees will go to the default setting of their investments. This default setting is a 60/40 portfolio.

But the portfolio split should be dictated by your life goals, other income, spending needs, and when you plan to use the funds.

For someone who has absolutely no need for his retirement assets he has saved, or perhaps an inheritance he never plans to touch, he can afford to take far greater risk than his neighbor, who will be making monthly withdrawals to live.

The portfolio allocation should be the last thing you establish, not the first.

The Fear of Running Out

For some that fear running out of money, they instead do the opposite and hoard. The irrational fear leads to an ever growing account balance that means experiences and utility that could have been enjoyed never is.

I understand the mindset of someone who grew up early in the late stages of the Great Depression. I see it in things passed down from my grandparents to my parents. So I’m not totally unsympathetic to this thinking.

But by overemphasizing this fear, life isn’t actually enjoyed.

Phase 3: Develop the Preventive Plan

Once you’ve identified how you might fail, you can build a plan that specifically prevents those failures.

Plan First, Allocate Second

Never start with an arbitrary percentage of stocks and bonds. Don’t decide you’re “going to be 60/40” before you’ve outlined what your life looks like.

It starts by understanding how much you need/want on a regular basis.Some questions that should be prompted:

What do you actually need from your portfolio each year?
What sources of guaranteed income do you have?
What’s the gap between your essential expenses and your guaranteed income?
What’s the gap between your desired lifestyle and your guaranteed income?

These questions have specific answers for your specific situation. The portfolio allocation should be designed to meet those needs.

Build a War Chest Against Bad Markets

Your allocation should be intentional. Once you know your lifestyle desire, cash flow needs, and what you have saved, it’s worth building our your reserves.

This is your war chest. Your market-based account will go down in retirement at some point. This war chest provides your protection.

Rather than selling an asset that’s already taking a beating, sell off one that’s level or slightly up.

You are holding these assets for the inevitable rainy day that is coming.

Challenge Everything Periodically

I recently wrote a post discussing a 30 year retirement, from 1995 to 2025. If you’re reading this and you were alive and coherent for those past 30 years, it’s been quite a ride.

We’ve had legendary market corrections, record low interest rates, inflation spikes, and bubbles burst.

We’ve also had incredible growth, technological innovation, recoveries and the Cubs even won the World Series.

While we can’t predict everything, we can game things out. That’s what the most prepared do. Understand there’s a chance we may need to course correct based on things outside of our control.

We don’t run back up generators when the power is on and the weather is good. But things sometimes go wrong. Make sure you are prepared for the storms that come.

Phase 4: Run Regular Inversion Audits

Retirement plans are not equivalent to retirement planning. Planning is an ongoing process, and 5 years from now, your life, goals, and financial situation are almost assuredly going to look different.

As a result, your failure premortem is likely to look different as well.

Understand what your threats are, and plan accordingly.

A Word of Caution

The challenge is to not dwell on the failure. It’s to be ready to course correct if so.

If you’re leaving for a road trip, and know rush hour traffic may hit at a certain time, it might be worth considering an alternate route or considering leaving at a different time.

But that decision shouldn’t impact every single aspect of the road trip. And if you let the failure premortem run your retirement, you may instead give way to an unnecessary fear of failure.

If you’d like to run a failure premortem on your own retirement plan with someone who specializes in finding the gaps before they become problems, we can help. At Hyperion Financial, we work with our clients to stress-test their retirement plans against the specific risks that could derail them. Call to schedule a conversation.