The point: A realistic retirement plan doesn’t start with a number and work backwards; it starts with the question “why?”
Quick, go to the personal finance section of you newspaper or feed reader and count how many articles and posts from last week start with the question “How much (insert financial product here) do I need?” and end with a number like “$1,000,000” or a tired “about 70% of your current income”?
(Answer: eleventy-billion. Give or take.)
I can see the attraction of approaching your finances like this, I really can. It’s so nice and tidy, which is why journalists and bloggers love writing about it. (Question? Check. Answer? Check. Lets go to the beach, because my work here is finished.)
But if you’re serious about thoroughly understanding your money, building real wealth, and reaching for something more than what you have now, starting with a number is starting at the wrong end of the question.
In my last post, I wrote about the inadequacy of the “retirement planning” regular people get at the bank or with a commissioned salesman. This “planning” is ostensibly meant to answer the question “how much do I need to retire?”, but really only serves two purposes for the institution:
- Scare you into purchasing more of their retirement-branded products, or
- Convince you to list any assets not already on their custody, so they can offer a “second opinion” and have a shot at collecting them.
(What, you thought the salesmen were actually going to give out retirement advice for free? Just because you didn’t cut them a cheque, doesn’t mean you didn’t pay for it.)
Starting at the right end of retirement planning means asking a question that salesmen just don’t ask, because the answer take more than an hour to figure out, and they have other – more lucrative – activities to pursue.
Asking yourself this question is the (absolutely, unequivocally) mandatory place to start if you want a realistic retirement plan. It’s not a Cosmo quiz, so it will take longer than four minutes, and you might want to pour yourself some coffee.
The Most Important Retirement Question You’ll Ever Answer: WHY?
Answering “why?” is figuring out what you want your life to look like in the future. We like to call it “retirement”, because it’s an easy shorthand, but this exercise is about way more than an age and a resignation letter.
This exercise cuts right to the heart of your relationship with money; why you’re slaving away to earn it, spend less of it, borrow it, repay it, invest it, and leverage it. Are you hoping to buy stuff, or time, or experiences?
Do you imagine your life continuing on just about the way it is now except with an older body and fewer kids around? Or do you hope for something radically different?
If your “Why?” involves reading in a chair on the porch, surrounded by waist-high piles of books and eating junk food, not having to watch your grocery budget, and little else*, and you want it to happen as soon as possible, your future spending plan will look dramatically different from the person’s who wants to work until she qualifies for the most pension she can get and then start a business selling kale (or whatever).
Okay, now what?
Now you get to dive head-first into a pile of bank account and credit card statements. Hooray!
(But it’s going to have to be later. This post is long enough already.)
*That would be me. Surprise.
This is part two of a six part series about useful retirement planning. If you’re starting with this post, the rest of them are here:
- RRSPs: Hunting Season (what banks and brokers are really offering at RRSP season)
- Numbers, Numbers, Numbers (how to calculate exactly what you’ll spend in retirement by figuring it out today)
- Incoming (how to predict your retirement income from public and private pensions)
- Fun With Retirement Calculators (how to make the best use of a faulty tool)
- Effective Retirement Planning is About Spending, Not Saving (And Sit Up Straight) (what to do if you can’t save enough)