Retirement Planning: How To Make Rational Decisions In The Face Of Daunting Uncertainties

Written by Ben Carlson

Retirement planning can be a daunting prospect. The entire process of trying to plan for something that is decades out into the future is overflowing with uncertainties, assumptions, and guesswork. That is why so many people put it off. While it’s something recognized by most people to be vitally important, most people don’t think it’s urgent, so they put it off to focus on what’s right in front of them right now. How is one ever supposed to make rational decisions in the face of such uncertainty?

Here’s my list of uncertainties involved in the retirement planning process:

Future financial market returns

The future path of interest rates

The severity and timing of bear markets

The magnitude and timing of bull markets

The sequence of your returns

Your personal spending needs

Your financial needs and desires

Where you are in your financial lifecycle

How much longer you plan on working

What you plan on doing with your money some day

How long you’ll live after retirement

Whether you’re going to be a net saver or spender in the near future

Your current and future income levels

Your ability, willingness and need to take risk

How your perception of risk will change over time

Unexpected life events and challenges

Withdrawal strategies during retirement

Future tax rates

Your future savings rate

Social security elections and benefits

Healthcare expenses

Inflation

Changes in the cost of living where you live

Your debt levels

How many people are dependent on you financially

Insurance needs

Your ratio of human to financial capital

How is one ever supposed to make rational decisions in the face of such uncertainty?

First of all, you have to understand that financial planning is a process, not an event. Investors are too easily distracted by all of the underlying assumptions involved in creating a comprehensive plan. Yes, those assumptions are important, but how you react when life invariably gets in the way is far more crucial. A real world plan rarely plays out like it does on a spreadsheet. Therefore the implementation of the plan is the real key to success.