Redundancy Prevents Catastrophe

It seems absurd that designing parachutes is just as complicated as making rockets. How could the time spent on a mostly nylon device come anywhere close to that spent on the towering cylinders we launch into outer space?

It’s not from lack of effort either. We’ve spent more than 500 years tinkering with parachutes, from early sketches by Leonardo da Vinci to modern renditions created by SpaceX and Boeing.

The problem with parachutes is the degree of unpredictability involved.

Erik Seedhouse, an assistant professor at Embry-Riddle Aeronautical University explains: “Parachutes encounter turbulent and dynamic airflow, which is almost impossible to replicate with computers. Wind speeds vary at different altitudes. Atmospheric pressure changes in a hundredth of a second. You’d think with all the computing power we have now, we’d be able to model it, but we can’t.”

The confluence of hectic factors that make parachute science so difficult are similar to those retirees face with their finances.

We focus intently on the accumulation phase of life – saving and investing, and simultaneously protecting our ability to do the saving and investing. However, the decumulation phase of life is equally as important – it’s a lot more than just “spending the money”.

Retirees walk the tightrope of spending enough to enjoy themselves, but not so much that they run out of money. Balancing spending needs with turbulent and dynamic market returns further complicates matters. And, despite terrific advancements in investment and financial planning software, we will never be able to flawlessly model how a portfolio experiencing withdrawals and market returns in tandem will fare. This is mostly because withdrawals tend to change with life circumstances, and markets are impossible to predict.

Financial planners and parachute designers combat this uncertainty with similar solutions, too.

One of the big themes of NASA’s Apollo era was that redundancy enhances safety. They learned to design systems that would function if one of the parachutes failed to operate as expected.

It is for precisely this reason that, when we build financial plans at Mullooly Asset Management, we like to show clients various scenarios where portions of their plan don’t unfold as expected.

What if we experience lower returns? What if there are changes to social security? What happens if one spouse doesn’t live as long as we expect? What if spending is higher than we estimated? Knowing that the entire plan won’t crumble, should one aspect of it not pan out, provides peace of mind to all parties involved.

As Warren Buffett has shared before, “You build a bridge that 30,000-pound trucks can go across and then you drive 10,000-pound trucks across it. That is the way I like to go across bridges.” In the face of uncertainty, sometimes the best we can do is to plan for the worst. Redundancy helps prevent catastrophe.