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Retirement Planning 101: Getting Your Bearings

Retirement Planning 101: Getting Your Bearings

Planning starts with figuring out where you stand and in what direction you are facing. In lifetime financial planning, we start with your family balance sheet to get your bearings. In the previous post in this series, “Charting Your Retirement Lifestyle,” I charted the differences between some typical retirement lifestyles that underlie your retirement goals. Here we start to drill in on your lifestyle.

Your Household Balance Sheet as a Life Compass
Your household balance sheet includes not only your savings and investments, but also your household income, future earning potential, and future benefits like Social Security and pensions. Alongside these financial inflows are all your current and future expenses. The balance of these inflows and outflows defines your household standard of living.

When you are young, your household balance sheet is weighted towards your current income plus future earning potential (your human capital). You may have little savings when just starting out.

Forty years later, your family balance sheet should be weighted towards your savings and investments (financial capital) and the value of your household Social Security and pension benefits (social capital), as your earnings decline and finally end when you stop working.

To get to a balance sheet that is heavily weighted towards financial and social capital, you must convert your income, your human capital, into savings and investments over the course of your working lifetime. The lifestyle you will be able to maintain during what could be a 20-30 year retirement depends in large part on how well you have managed to build your financial capital—your savings and investments—during your working lifetime.

This is why the single most important thing you can do at any age to improve your retirement lifestyle is to save money from your current income and avoid day-to-day debt. The sooner you start a systematic savings process, the more the power of compounding returns will amplify your savings rate, and the more your financial capital will grow.

Using Your Household Balance Sheet As A Planning Tool
The view of your balance sheet allows you to see the levers that affect your family lifestyle. The higher the risks to your human capital (ie, if employed in professional sports, entertainment or a risky industry) or social capital (possible changes to Social Security, taxes and Medicare), the more savings (financial capital) you need to set aside now to offset those risks. And the less risk you should take investing those savings.

Similarly, by knowing the potential value of your lifetime earnings and savings, you can avoid overspending on large expense items like housing, cars, extravagant vacations, and so forth. If you are able match your income with your current expenses while building your savings, then you will build a sound foundation for your family’s future.

Contrast this broad view that arises from your family balance sheet with the narrower traditional approach of the financial services industry which zeroes in on your personal investment portfolio. While the typical financial advisor’s 60/40 stock/bond investment plan may make sense as a way to maximize investment returns, it may miss the mark as the best way for you to implement a lifetime financial plan to build a sustainable standard of living for your family.

Investing by itself is accumulation-centric. Your unique needs may require a safer or riskier investment approach, more or less market exposure, more or less reliance on insurance products, and more or less focus on accumulation. Managing debt and expenses may be more important to your financial future than taking more risk for a marginally higher return in your investment account.

To a financial advisor who sells investment products, the solution to most problems is a tweak to your portfolio to amp up returns. In a lifetime financial plan, on the other hand, the goal is to build a sustainable standard of living for your household, using all the tools and methods of personal financial management. Beyond investing sensibly, managing all the unique risks that you face and adjusting your balance sheet accordingly is a significant part of lifetime planning. We’ll talk about this more in an upcoming post.

Now that you have an overall understanding of your household balance sheet, in the next post, “Household Spending and Your Retirement Plan,” we’ll take a closer look at plotting your retirement expenses, and in later posts, we’ll use some simple measures to see how near or far you are from your retirement goals.

Comments (3)

  1. […] may be more applicable to you at different times in the future. In the next post in this series, “Retirement Planning 101: Getting Your Bearings,” I’ll discuss the role of your household balance sheet in Lifetime Financial […]

  2. […] That uncovered $91k/yr in expenses must come from your savings (financial capital). We talked about these three different sources of household capital in the introduction to your household balance sheet earlier ( “Retirement Planning 101: Getting Your Bea… […]

  3. […] in most things, you need to find a balance, based on your personal balance sheet and a sound analysis of your essential and discretionary expenses, to ensure your savings and […]

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