The Hallmarks of a Good Plan

Last week I wrote about the need for a Saving-Spending-Investment Plan. Fair enough. But what does such a plan look like? Allow me to conceptualize a bit, and list the characteristics of a good plan. Then in future posts, I can get more specific.

A good plan should be reasoned, flexible, individually-tailored, reality-based, long-term, self-adjusting, incremental, affordable. Let me translate these virtuous sounding words into something a bit more concrete. Here’s what I mean.
• Reasoned. Your plan should be designed to achieve your goal. Since your goal ought to be to equalize your spending over your life, don’t try to save your entire retirement fund in your last five working years.
• Flexible. Life is going to throw you curve balls. So your plan should be flexible enough to accommodate the unexpected. For example, don’t invest too large a percentage of your funds in an investment that doesn’t give you access to principal.
• Individually-tailored. There are plenty of statistics that can distract. Maybe the average working person retires at age X. But you may be planning to retire at age Y. That will change the calculus.
• Reality-based. You’ll have to make lots of assumptions: how much your assets will earn, how long you will live, what your tax rates will be, etc. Don’t be too optimistic or too pessimistic in your assumptions. Just try to be realistic.
• Long-term. The assumptions you employ in executing your plan should be long-term, since you’re planning for the long term. A typical family goes through a 40-year working career, and then transitions to a 35 (or more) year retirement. Your equities may have lost 40% in value in 2008, but that’s not a realistic assumption for a 75-year plan. In both good times and bad, this too shall pass.
• Self-adjusting. Since your assumptions will inevitably turn out to be wrong, your plan should include a mechanism for periodically—at least yearly—adjusting to rude reality. You’re making projections, not predictions.
• Incremental. And your adjustments to reality should be smooth. If your equities lost 40% in 2008, don’t try to make up for the loss in one year. You still have to eat. Your plan should be designed to spread unusual losses, and windfalls, over the long run.
• Affordable. Attune your annual saving (or spending) goals to your own economic circumstances, not the lifestyle you’ve read about in a magazine. You’re not Prince Charles.

What have I left out?