Retirement Shortfall Three-Lever Rule
Close a retirement gap by spending less, working longer, or saving more
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 4
- Confidence
- 96%
The rule begins by refusing to treat optimistic investment returns as a planning lever. McNabb argues that, when expected market returns are lower, a retirement plan has only three practical controls: spend less after retirement, work longer before retirement, or save more during the earning years. A planner should model the shortfall using realistic assumptions, quantify how much each lever changes the outcome, and then choose one lever or a combination sufficient to close the gap. The value of the model is its constraint: it replaces vague hope with explicit trade-offs the saver can control. McNabb emphasizes that the message is difficult and unglamorous, but presenting it is the responsible duty of financial professionals.
Origin
Extracted from Masters in Business during McNabb's discussion of lower expected returns and the choices financial planners present to retirement savers.
Core principles
- 01Do not assume markets will rescue an underfunded plan.
- 02Retirement outcomes must reconcile spending, working years, and savings.
- 03Lower expected returns require action on at least one controllable lever.
- 04Responsible planning uses realistic return assumptions rather than attractive forecasts.
How to run it
- 1
Model realistic returns
Build the retirement projection with expected returns appropriate to current valuations and yields. Avoid inserting a higher return merely to make the plan balance.
Pro tip Use a range of outcomes rather than a single precise forecast.
Watch out Planning on markets to bail out the saver hides the shortfall rather than solving it.
- 2
Measure the gap
Compare projected resources with the desired retirement timing and spending. Express the difference clearly enough to test corrective actions.
Pro tip Translate the gap into the additional saving, extra working time, or spending reduction required.
Watch out A vague statement that the saver is behind does not support a decision.
- 3
Test the three levers
Model spending less, working longer, and saving more as separate scenarios. Then test combinations when no single lever is realistic or sufficient.
Pro tip Start with the lever the saver can change soonest, while showing the trade-offs of all three.
Watch out There is no fourth lever that guarantees a higher market return.
- 4
Commit to the adjustment
Choose a sufficient change or combination and reflect it in the savings plan, retirement date, or spending target. Revisit the model as circumstances change.
Pro tip Automate the higher savings rate when saving more is part of the decision.
Watch out Selecting a lever without changing behaviour leaves the original shortfall intact.
In the wild
A saver reruns a retirement projection with lower expected market returns and discovers a gap. Rather than increasing the return assumption, the saver compares retiring later, raising monthly contributions, and reducing planned retirement spending, then adopts a combination that closes the modeled shortfall.
→ The plan becomes viable through controllable changes rather than an optimistic forecast.
Common mistakes
Using return as a rescue lever
An assumed higher return is not under the investor's control and can make an inadequate plan look viable on paper.
Hiding the trade-off
A responsible plan states plainly whether the adjustment requires lower spending, more working years, more savings, or a combination.
Is it for you?
Best for
It is best for savers whose projected retirement plan falls short under conservative return assumptions.
Not ideal for
It is not a complete financial plan for someone whose spending needs, retirement date, and current savings are still unknown.
From the transcript
“don't expect the markets to bail you out over the next decade. You need to be saving at a higher rate than you are.”
“you have to either plan on spending less when you retire, or working longer or saving more.”
“there're no there're no other levers”
From the episode
Vanguard CEO Bill McNabb: Masters in Business (Audio)