The uncertainty of Retirement Planning

As suggested by its title, the article advocates that investors work backward. They should begin their plans upon entering the workforce, by specifying their desired income during retirement. Once that is known, and an asset allocation is specified, the required contribution rate can be calculated.

This process is aspirational. That is, while Javier's model is fixed, providing investment returns, contribution amounts, and withdrawal rates with assurance, investors enjoy no such confidence. As young adults, they know neither what the financial markets will bring nor (yet) what income will meet their retirement needs.

Their lives lie ahead of them.

The point of the paper is to change the investor's mindset. Javier wishes to combat the standard practice of keeping one's head down, contributing to retirement accounts according to perceived ability, then looking up as retirement approaches and wondering what the accumulated assets will be able to afford. Better to know that answer ahead of time.

To be sure, investment reality will confound the initial assumptions. That is fine; the plan can always be adjusted.

*Two examples have long influenced my thinking about retirement planning.*

My father retired at age 50.

He was ideally placed for the arrangement. He had his children young, so they no longer required (much) support. He had earned high wages. He disliked his job, intensely; he derived little pleasure from spending, not caring about his clothes or restaurants or what car he drove; and his primary hobby, rebuilding houses, created income rather than consumed it.

Why not quit as soon as he was able?

The decision worked out very well for him. He never regretted leaving dentistry, nor did he pine for the consumer baubles he had once enjoyed. He had arrived late to the not-yet-invented FIRE Movement, having pursued the “good life” through his mid-30s, but once he embraced frugality he did not look back. Nor did he fuss about running out of money, although he was not terribly wealthy.

He knew that if worse came to worse, he could always economize further.

Around 20 years ago, a man said to me, “Programmes always tell me to save too much. When I retire, I want a cottage by the lake, where I can go bass fishing. I don’t need 80% of my salary to do that.”

Good point. Standard approaches assume a high level of consumerism, thereby requiring most wage earners to have 40-year careers. That choice suits many. They follow the path unquestioningly, perhaps because they like working hard, playing hard--or perhaps because their paid occupations give them self-worth.

*One lifestyle size does not fit all.**

Larissa Fernand explored that sentiment in Why Early Retirement is a Wrong Goal. She emphasized the power of the first half of the FIRE acronym, financial independence, while urging readers to think carefully about the second portion, retiring early.

(For those unfamiliar with the acronym, the initials stand for “Financial Independence, Retire Early”-- a goal typically achieved by combining a relatively high income with low spending.)

She writes, “Retirement is not a destination, and certainly not a ‘happily ever after’ reality. You have to plan through it. Building up a retirement corpus is just one aspect. Figuring out your life and how you plan to spend the time is the other. It would be a shame if you attained the financial independence to enable an early retirement, only to be confronted by an existential crisis.”

Which led me to reconsider my future bass fisherman. Did he truly know that the simple life would suffice?

My father fantasized about that throughout his working life, without doing anything to advance his cause, besides dreaming that he had invented the Pet Rock.

When he was 40 years old, my father thought he finally understood what would make him happy. He would leave his stressful corporate job, teach high school in New Zealand, and catch trout every afternoon on the Tongariro River. He promptly did all those things; it lasted 12 months, before he fled back to the U.S. seeking another corporate position.

Who in their youth knows what will fulfill them at age 64? Remember Paul McCartney wrote When I’m 64, when he was just 16 years old. He does indeed have grandchildren, as he envisioned when he was 16, but rather than scrimping and saving for his summer rental on the Isle of Wight, he tours the globe.

For many people, what ends up mattering is not retiring early but rather possessing the option to do so.

Freedom is power. So is financial independence.