Tuesday, May 2, 2017

Retirement Planning Explained Backwards

Some time ago, I began looking for research identifying what a good retirement plan document should address and a process for developing one but was surprised to find very little written on the subject.

The best resource I found was from the Retirement Income Industry Association (RIIA)[1]. RIIA's philosophy is that planning begins with a Household Balance Sheet® that identifies all of the resources available to the retiring household.

That's fine as far as it goes, but I like to begin planning a step earlier. From my perspective, the RIAA approach jumps into figuring out how to get there before figuring out where we want to go. I suspect RIIA would say this is implied, but I think it should be written and agreed with the client from the start.

I'd rather identify the highest-level goals in a mission statement[2] and then implement the RIAA or an equivalent process as step two rather than try to accomplish three different things in one step. I refer to this second step as finding the intersection of what's desirable and what's possible[3] but that is essentially what the RIIA process does.

I believe that retirement planning should be top-down like the strategic planning process used by many businesses[5] but I suspect that the entire process is easier to understand when explained from the bottom up.

Let's use this process to plan a vacation. First, we decide on a mission. Do we hope to spend our days relaxing, learning about another culture, visiting old friends, communing with nature? Say we choose "learning about another culture."

Next, we decide on our objectives: where we want to go, how long we'll stay, and how much money we have available to spend – and this is key – to learn about another culture. In other words, our objectives stem from our mission.

Lastly, we choose the specific tactics to meet the objectives that achieve our mission. Will we fly United (insert joke here) or Spirit (insert joke here). Will we stay at a Marriott, a Holiday Inn Express or a campground? What will we pack? Those decisions depend on our objectives and our objectives depend on our mission.

This may seem obvious and intuitive but it isn't uncommon to hear someone say that they have decided to fund retirement with annuities, a stock portfolio, or even an increasing stock allocation when they have documented neither their mission nor their objectives. That's a little like deciding to fly American Airlines and then deciding where you want to go and then deciding why you want to go there.

So, let's start at the end of retirement planning. We'll start with the bottom layer, Step 3. in the diagram above. Every year we need to place a series of bets, though often these will only be a tweak of existing bets. I identified several of these bets in Retirement Roulette[4]. They include a bet on a retirement date, a bet on an amount to spend this year, a bet on stocks, a bet on bonds, a bet on cash, and so on.

I further noted in Retirement Decisions with Expiration Dates[6] that not all of these bets will always be available. We might be able to place a bet on long-term care insurance this year, for example, but a future disqualifying decline in our health could take that bet off the table. If we claimed Social Security benefits last year we can't claim them again this year.

Retirement plans explained backwards.
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We can't effectively plan year-at-a-time without the context of long-term retirement objectives. That context comes from our strategic retirement plan. We can't identify the next leg of our journey without knowing our next milestone, so we need to identify those strategic objectives in the step before making our annual bets.

A strategic plan is based on The Intersection of What's Desired and What's Possible[3]. It identifies the strategic goals or "milestones" we believe we need to meet in order to achieve our mission, so we need to identify that mission in the step before identifying our strategic objectives.

We should begin retirement planning by crafting A Mission Statement for Retirement[2] that is effectively our idea of what would constitute a successful retirement. Again, this may sound intuitive and obvious, but most retirees to whom I recommend this process find it challenging to articulate their mission in a paragraph or two. Many want to say, "My mission is to retire and not run out of money." That's probably true but not terribly helpful.

While these three components of a strategic retirement plan constitute a "living document", they will change with different frequencies. An annual operating plan will be changed most frequently, although the changes will range from substantial to minor tweaks.

Strategic plans should be changed infrequently as the result of major unexpected changes in our life that affect our finances (divorce, death of a family member, bankruptcy, major illness, etc.)

A mission statement might change on rare occasion but is intended to be an enduring statement of retirement goals and personal values and hopefully is written as such.

I have explained the steps of developing a retirement plan in reverse order because I believe it is easier to understand the entire process that way, but I suggest that retirement planning should be a top-down process. In simplest terms, it goes something like this:
  1. Write down the major things you hope to accomplish in retirement. Accomplishing these major goals constitutes what you would consider to be a "successful" retirement[5]. I want to maintain our standard of living. I want to live in Peru. I want to leave the family home to my children.
  2. Identify the strategic objectives that would achieve your mission. If an important part of your mission statement is to never outlive a certain standard of living, for example, annuities, Social Security benefits and/or bond ladders might be your chosen strategies.
  3. Review your mission statement and strategic plan every year and modify them if necessary when there have been major life changes.
  4. Identify the steps you need to take in the coming year to progress toward the strategic objectives you just reviewed and perhaps modified. Decide if this the best year to buy an annuity or claim Social Security benefits, for example. As I said in Retirement Roulette, place your bets.
What if you have already retired and didn't do any of this stuff? 

Get started. It's never too late to plan.


[1] Retirement Income Industry Association (RIIA).

[2] A Mission Statement for Retirement, The Retirement Cafe.

[3] The Intersection of What's Desired and What's Possible, The Retirement Cafe.

[4] Retirement Roulette, The Retirement Cafe.

[5] A Model of Retirement Planning, Part 1, The Retirement Cafe.

[6] Retirement Decisions with Expiration Dates, The Retirement Cafe.


  1. You have left out the most important objective of all: how can a large financial firm maximize its revenue from your account (sarcasm intended).

    "Some time ago, I began looking for research identifying what a good retirement plan document should address and a process for developing one but was surprised to find very little written on the subject."

    This is not a surprise to me. As far as I can tell, the amount and quality of thought, research, and writing about good retirement financial practices is inversely proportional to the size of the financial services/products firm.

    Bill Bengen came up with the 4% rule as a small financial planner in 1994 - he and others have continued to refine this into various different approaches, many of which are no longer 4%. However, typically the large financial firms are still touting the 4% rule as something Moses got on the tablets.

    It appears to be small fee-based financial planning firms (like you) and some academic researchers that are providing the really valuable insights. The large financial firms where most people have most of their money are almost silent or are just focused on selling products regardless of whether or not they are appropriate. No wonder there is a retirement crisis.

  2. Ditto anonymous ... being in the profession I see the same thing; basically a products based approach to the problem rather than a process based approach. Process based approaches are also evidence-based (those "academic researchers" you mention).

    Your discussion above reminds me of the "Big Rocks" analogy discussed briefly in this YouTube video https://youtu.be/v5ZvL4as2y0

    Looking forward to your next musing Dirk!

    1. Any time you read research you need to consider the source first and foremost. Financial planning firms are in business to make money so it shouldn't be surprising that they would recommend things that are profitable for them. (Although, I was recently incredibly impressed by an insurance agent who recommended a client of mine that I had referred buy insurance from another carrier because they offered a much better deal for this particular scenario.) I don't begrudge them making a living.

      Academics tend to dive very deeply into narrow subjects so they are less likely to tackle broad subjects like what a retirement plan should address. It's their nature.

      Ultimately, I suppose, we all do our part.