One reason I have a innate distaste for both Liability Matching Portfolios and Safe Withdrawal Rates is that they pretend your current spending — and all the things that constitute that spending — is a useful guideline for your spending over the next 30+ years.
It is a consequence of the “end-of-history illusion”, the belief that we have stopped growing & changing (i.e. reached the end of our own personal history). Several years ago a group of researches started publishing their findings. “When asked to predict what their personalities and tastes would be like in 10 years, people of all ages consistently played down the potential changes ahead.”
They interviewed 19,000 people between the ages of 18 & 68 and asked them to predict how much they would change in the next decade. It is true that our personality, our values, and our preferences become more stable as we age but they never become perfectly stable.
And this is over a mere 10 years. For “normal” retirement we’re talking about 30+ years. For early retirement it can easily be 50+ years.
They called this phenomenon the “end of history illusion,” in which people tend to “underestimate how much they will change in the future.” According to their research, which involved more than 19,000 people ages 18 to 68, the illusion persists from teenage years into retirement.
We should naturally have a large degree of humility about our future selves. For most retirement planning this is, admittedly, somewhat of an academic issue. People building Liability Matching Portfolios are, almost exclusively, so rich that they can afford to put 20+ years of their portfolio in a TIPS ladder and still have substantial assets left over, should their “liabilities” change. And people relying on Safe Withdrawal Rates can draw comfort that the vast majority of the time portfolios grow so much that we can safely withdraw substantially more without threatening the fecundity of our portfolio.
I think where it is most relevant is for people whose retirements don’t come with a lot of optionality: people who are trying for leanFIRE, people reliant on pensions from an employer, people who annuitise a large percentage of their portfolio, people who dream about retiring to a Low Cost of Living (LCOL) location.
But I think it is also an argument in favor of probabilistic retirement design over the safety-first floor & upside models. The floor you are guaranteeing isn’t as meaningful as they pretend it is and the additional upside optionality of probabilistic approaches carry real benefits that are discounted.
