The Raw Materials of Retirement Planning
Raw materials are the basic inputs in all finished products. Work is the organization of raw materials in the attempt to create something of value, both in tangible manufacturing settings as well as the intangible world of concepts and ideas.
→ The field of personal finance works with two primary raw materials – time and capital. In order to successfully plan for the long-term goal of retirement, both must be understood and harnessed properly.
Managing Time
As discussed in the 40/70 Reality, a career may last around 40 years, but expenses continue throughout a lifetime. Thus, there is a requirement to finance the last 30 years with savings (capital) earned during the first 40. Given the nature of compounding returns, future spending goals cost less the sooner you start saving. For example, if you want to spend $50,000 your first year in retirement, which starts 30 years from today, here’s how much you would need to put aside (assuming a 3% real return) in order to have $50,000 available to cover your first year of retirement spending, based on how far in advance you start saving: ⇣
Segmenting Time
⇢ While the retirement planning horizon may at first glimpse appear as one long period of time, equal to the investor’s life expectancy, planning for retirement progresses over multiple stages: early/mid-career, mid/late career, and post-career. It is important to think about the unique objectives, risks and questions along each stage, as outlined here:
Depending on where investors are along this continuum, how these questions are answered and what goals are prioritized, the retirement strategy can be customized and modified over time. ⇣
Managing Capital
⇢ The field of finance has traditionally been concerned with the management and allocation of financial capital. When saving for retirement, however, there is an additional form of capital to be considered, human capital.
“Save everything for tomorrow, and you’ll miss out on investing in life today. Similar to many other aspects in life, planning for retirement comes down to managing trade-offs.”
Working professionals earn compensation each year as they practice their trade through long hours of hard work. Of course, a lifetime of wages adds up, and saving in 401(k)s and IRAs is the process that converts human capital into financial capital.
Thus, financial capital is the engine that covers expenses when paychecks stop, and human capital is the fuel that powers the engine.
The allocation between consumption and saving determines what today’s spending and tomorrow’s resources will look like. Burn all the fuel now (through consumption), and there will be nothing left in the tank for the future. Save everything for tomorrow, and you’ll miss out on investing in life today. Similar to many other aspects in life, planning for retirement comes down to managing trade-offs.
Conclusion
Time and capital both work together in personal financial planning. Just as the farmer needs soil, seed and time, investors need a system for managing capital and time to allow their goals to come to fruition. ⬥
Investment advisory services provided by Forward Wealth Management, LLC. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.