Sun Tzu or a Rubik’s Cube?

The ancient Chinese military strategist, Sun Tzu, wrote, “Know your enemy” around 500 years before the birth of Christ. A better translation is something along the lines of “Know your enemy and know yourself and you need not fear a hundred battles.

I readily confess that I have not read The Art of War, or at least don’t remember reading it, though I have read many things written about it. I stumbled across such a reading this week.

I would paraphrase the “general” idea (pun intended) behind “know your enemy” as recommending that the more you know about your opponent in a strategic game with uncertain outcomes[1] the better your chances of success. Retirement finance is such a game. Knowing a lot about your enemy doesn’t guarantee success in warfare or in retirement finance.

The “enemy” I have in mind is the loss of one’s standard of living in retirement. It helps to understand this enemy but understanding it doesn’t guarantee you won’t succumb to it.

This brings me to the Rubik’s Cube I noticed in the back of my closet this week. I could only remember how to solve one face but I recalled that there are well-defined algorithms for solving the entire cube and I googled one[2]. Follow these directions and you will solve the Rubik’s Cube every time.

Retirement finance is harder to solve than a Rubik’s Cube.

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There is no equivalent set of algorithms to solve the retirement spending problem with certainty. Sure, we can fund retirement solely with Social Security benefits and fixed annuities but that only guarantees the income side of the equation. The expense side will always be uncertain and our goal in retirement isn’t really to secure income but to secure non-negative cash flow.

Warfare and a Rubik’s Cube are both complex problems to solve but unlike warfare, the Rubik’s Cube problem has no opponent – neither man nor nature – to introduce uncertainty.

The problem is that many of us hope to approach the retirement planning problem as a Rubik’s Cube instead of a battle, a stochastic game against nature, or a visit to a roulette wheel[3]. Buy an annuity, time-segment your portfolio, invest in index funds, minimize your taxes. Surely there is some list of directions on the Web like those for solving a Rubik’s Cube that more or less guarantees a successful retirement, right?

Unfortunately, there is not. Retirement finance is intrinsically fraught with risk. We can know our enemy well but the main thing we know about that enemy is its uncertainty. We can do all the right things and fail. We can do all the wrong things and succeed.

My favorite example of doing the wrong things and succeeding is my friend Gerry’s blackjack hand. I once watched Gerry split a pair of fives in a blatantly rookie move, turning a pretty good hand of ten into two bad hands of fives . . . and win both hands.

Sometimes the force is with you.

If you retired in 1982, according to a column written by Wade Pfau[4], and lived 30 years you would have had a hard time depleting your savings with a reasonable sustainable withdrawal rates strategy. Pfau figures a 9.8% annual withdrawal rate would have avoided portfolio depletion. The same retirement beginning in 1966 would have survived only 4% withdrawals. Those who retired in 1982 could split a pair of fives and probably still win.

My favorite example of super-intelligent people creating lovely, complex algorithms that failed miserably is the story of Long-Term Capital Management. This hedge fund, the subject of the book When Genius Failed by Roger Lowenstein, was initially highly successful under the leadership of a former Wall Street bond manager and two future Nobel laureates. Eventually, however, LTCM failed, bankrupted its founders and brought the global financial system to its knees.

(I highly recommend Roger Lowenstein’s book, but Business Insider published a synopsis at the link below.)

As an aside, I often quote the William Bernstein dictum, “When you win the game, stop playing.” Occasionally, someone will write me to say that’s a bad idea (Note: Bernstein doesn’t have a lot of bad ideas).

Buffett: …It’s…an interesting story…The whole story is really fascinating because if you take John Merriwether, and Eric Rosenfeld, Larry Hilibrand, Greg Hawkins, Victor Haghani, the two Nobel Prize winners, Merton and Scholes, if you take the 16 of them, they probably have as high an average IQ as any 16 people working together in one business in the country…an incredible amount of intellect in that room. Now you combine that with the fact that those 16 had had extensive experience in the field they were operating in…In aggregate, the 16 had probably had 350 or 400 years of experience doing exactly what they were doing. And then you throw in the third factor that most of them had virtually all of their very substantial net worths in the business. So they had their own money up. Hundreds and hundreds of millions of dollars of their own money up. Super high intellect, working in a field they knew. And essentially they went broke. And that to me is fascinating…

…But to make money they didn’t have and didn’t need, they risked what they did have and did need, and that’s foolish. That is just plain foolish.”[5]

Sounds like Warren Buffett and William Bernstein agree on this point.

My point is this. Retirement finance is a probabilities game. There is no set of rules that guarantees a successful outcome like the set of rules for solving a Rubik’s Cube, even though both are complex problems. Retirement finance is more of a Sun Tzu thing.

Had Sun Tzu been a retirement planner of the probabilist school, he might have said, “Know your enemy and know yourself and you need not fear about 95 out of a hundred battles.


[1] A Tiny Bit of Game Theory, The Retirement Cafe´.

[2] How to Solve a Rubik’s Cube.

[3] Retirement Roulette, The Retirement Cafe´.

[4] What If Retirees Don’t Want To Run Out Of Money In 30 Years? by Wade Pfau.


[6] The Epic Story Of How A ‘Genius’ Hedge Fund Almost Caused A Global Financial Meltdown, Business Insider.


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