Financial advisers advocate a variety of pension goals. Some simply suggest trying to save a specific percentage of salary into a pension plan. Others target a total saved pension amount to aim for, in order to be ready for retirement. Yet others look to save enough to be able to generate a target retirement income.
Some people don’t think it’s worth worrying about retirement as it may never come; and if it does they believe that they’ll muddle through. Rather more simply wing it, and save what they believe they can afford.
Which approach makes the most sense? Or is there a better approach?
Personal pension goals
You need to understand your own motivations and attitudes before thinking about specific pension goals. For example, how much certainty about your financial future do you need? Can you tolerate short-term risk? How much do your life’s necessities (as opposed to luxuries) cost you? Are you willing to be flexible about your discretionary spending habits? Are you single or do you have a dependant life partner? And do you hope to leave a substantial legacy after you (and your partner if any) have died?
You need to have an idea of the answers to these questions before you can set sensible pension goals.
Mini pension goals versus outcomes
In the introduction I gave examples of typical pension goals that people might use. I prefer to think of these as mini pension goals. But the problem with them is that, where they’re focused at all, they’re too focused on just one aspect of retirement planning. In fact, there’s only one real measure of success in retirement planning, and that’s the lifetime outcome.
What’s a good outcome? Well, that partly depends on your personal motivations. Everyone would agree that a good outcome means not running out of money. For most it means having plenty of money to spend on luxuries. Some people would also need to avoid losing sleep over fluctuating investment valuations. For many it also means leaving a substantial legacy.
Very few people can structure their finances in such a way as to guarantee a particular outcome with accuracy. So the vast majority of us will need to play the odds to minimise the risk of bad outcomes, and maximise the chance of good ones. This will involve setting multiple mini goals, which together form a retirement strategy. Central to any good strategy is a sensible spending budget; by definition everything you don’t spend you save. Then there are decisions about how much of your savings should be in a pension plan, and how much elsewhere; related to this are tax planning considerations. You also need to decide how much risk you’re prepared to take with your savings and investments.
Optimising outcomes
If life is a like game of chance, then we only get to play it once. Winning the game means achieving our lifetime goals; and not just our pension goals. We’re bound to make wrong moves along the way, and we need to learn from them. But the earlier we devise a holistic lifetime financial plan, the better chance we have of ‘winning’.
EvolveMyRetirement® is not just a typical retirement calculator. Based on your current finances and your personal motivations and attitudes, it can generate for you a holistic optimised retirement strategy.