Dollars and Jens
Thursday, March 15, 2007
lifetime budgeting

I can't imagine having a finance column and getting questions like this:

My husband and I are retiring in 10 years, but haven't set up any retirement accounts. We need some advice on what we can do in such a short time. Any suggestions?
His first response is,
Wait a minute. I don't get it. How can you say with such certainty that and your hubby are retiring in 10 years when you apparently haven't saved a dime up to now?
This is more polite than "Stock up on dogfood to hedge against future price increases."

The thing is, though, she hasn't actually said she has no savings; she just doesn't have a formal retirement account. In fact, the columnist knows little about her financial situation, and goes on to speculate, suggesting for example that an option is to pull equity out of a house.

One and a half points that he makes, though, are fairly general, supposing she and her husband don't have savings:

When you do the analysis I recommend above, I think you'll find that unless you start really socking it away, you may be in for a downsized retirement. So do whatever you must to start saving as much money as you can immediately.
The flip-side to saving is generally spending less, so this boils down to "you may have to spend less in retirement, and/or you may have to spend less now." Saving now not only allows you to accumulate more for retirement, it allows you to adapt to the kind of lifestyle you can afford.

And here's where I'm going with this: you can choose to spend a dollar now, or you can spend what that dollar and associated investment returns would be later. This is true whether "later" is before or after retirement. I'm not a big fan of "retirement planning"; I don't entirely like the idea that we seem to have culturally adopted that you should be useful up until a certain magic age and then be left fallow until you die. More to this point, though, I don't think it makes sense to do your long-term financial planning the way it usually gets spelled out, in that you figure out how much money you're going to need at the magic cut-off date and save enough to get there. What matters is that net present value of future income, plus assets, equal (or exceed; that's okay, too) net present value of future spending. If you are planning to make less money at some point in the future than now, it makes sense to spend less than what you make now. If your heart is really set on retiring ten years from now, you can probably arrive at a reasonable estimate of the asset side, i.e. net wealth plus present value of future earnings. Lifetime budgeting requires that you figure out how you would most like to spend that over the rest of your life, and you'll save while it's less than your income, and dissave when it's not.

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