The Goal of Retirement Planning

To plan wisely, you’ve got to have a well-articulated financial goal.

My starting point for articulating a retirement planning goal is that the Future You should be just as comfortable as the Present You—no more, no less. Does the Future You deserve anything less than the lifestyle to which the Present You has become accustomed? I think not. And if you fail to plan, the Future You will rightfully be steamed at the Past You (which is now the Present You) for being so damned selfish, for living so high on the hog without even a thought for the You to come.

On the other hand, you don’t want to save too much either. Why deprive the Present You of the perquisites of an affordable lifestyle just so the Future You can live in greater luxury? Who died and made him king? Particularly since part of the time, the Future You will be elderly and presumably less able to enjoy some of the finer things—like travel, skiing and chewable solids. No, the goal here is to be like Goldilocks and to get your spending-saving balance just right (as best you can within the rather unforgiving limits of uncertainty), so that you enjoy a consistent standard of living, one that neither declines precipitously nor spikes vertiginously when you shift from working to retirement.

What does that mean? How do you turn that rather abstract and facile formulation into something more concrete—a dollar-denominated financial goal that you can aim at and plan for? I will cover that in future posts, but for now I would just like to suggest the guiding principle that the Present You and the Future You are equally deserving sentient beings.

I would also like to point out that the process differs a bit depending on where you’re currently sitting.

If you are just now embarking on, or already in, your retirement years, then presumably your available resources are set. There’s no more additions coming into your retirement war chest (other than investment earnings); just a lot of outgo. So the principle of equality leads to an exercise in establishing a spending plan that parcels out those resources over your and your spouse’s remaining lives, so your standard of living is roughly the same for the rest of your lives. In short, to determine an allowance for yourselves—one based not on the standard of living you wish you had, nor on the standard of living you enjoyed while working, but rather on the standard of living your now-cast-in-stone resources will allow. And then to find a way to live within that allowance.

If you are still in your working years, then the principle of equality leads to an exercise in setting aside some amount annually from your current salary, leaving you the same amount to spend every year, such that when you stop working you will have built up enough of a financial war chest to continue the lifestyle you got used to during your working years.

Of course there are lots of big and little adjustments to make in these processes that are unique to you. In future posts I will go over some of the more common ones. But I hope you agree with the basic principle. Both of You—Present and Future—deserve the same standard of living, neither one to be preferred over the other. The concept of discounting the future, while okay for future cash flows, has no place in setting both You’s standard of living.

I’d be interested to hear if you agree.