One Plan. Two Plans. Or Is it Three Plans?

You might say to yourself, “I think I’ll save 8% of my paycheck each month. That seems about right.” Or if you’re already retired, you might say, “I think I’ll spend 5% of my savings this year. That seems reasonable.” Well, where did those numbers come from? A Magic Eightball? Or did they just spring into your head in some divine Eureka moment? You need a plan—a reasoned, flexible, affordable, individually-tailored, reality-based, self-adjusting scheme. One that turns your financial goal into something concrete, a single number actually. If you’re working, that number is how much you should save this year; if you’re retired, that number is how much you should draw out of savings.

Maybe that’s two plans—a savings plan and a spending plan. No, wait, it’s more like two phases of a single plan—a Saving-Spending Plan!

You also need a plan for investing your savings, both during the accumulation (working) phase, and during the spending (retirement) phase. So you also need an Investment Plan to guide that part of the process. But wait! How you invest depends intimately on how much of your investments you’ll be spending, and when. So maybe we’re talking about a single plan: a Spending-Saving-Investing Plan!

Whatever. Whether it’s one plan, two or three, the important thing is that you have a well thought-out procedure for planning your retirement.

Why? What’s so important about a plan? First, it will protect you against chintziness—saving too much and robbing yourself of a more luxurious, but nonetheless affordable, lifestyle. Second, it will protect you against profligacy—spending too much to the detriment of your future self. Third, it will protect you against reaction—investing unwisely—buying high and selling low in response to current (and fleeting) events.

Our capacity for fooling ourselves is boundless. A plan helps guard against our own worst instincts.