Retirement Planning: From Z to A

Abstract

Retirement planning is an issue that must be tackled early and solved backward. It must be tackled early because little can be done if an individual is not on the right path and has only a few years left to work. It must be solved backward because it makes little sense to aim for a portfolio that may not be able to sustain the desired lifestyle in retirement. This article introduces an approach that integrates the working period and the retirement period; leads individuals to consider all relevant variables at the beginning of their journey; and enables them to start saving early to build a target portfolio designed specifically to sustain a desired retirement. The analytical framework introduced yields closed-form solutions for the target retirement portfolio and the contributions that need to be made during the working years to hit that target. The framework proposed is illustrated with an empirical base case, sensitivity analysis, and Monte Carlo simulations.

TOPICS: Long-term/retirement investing, portfolio management, retirement, wealth management

Key Findings

• • Retirement planning must be tackled early and solved backward.

• • It starts with an estimation of the withdrawals needed to sustain a desired lifestyle in retirement; continues with the determination of the target retirement portfolio needed to sustain those withdrawals; and ends with the contributions needed to build that portfolio.

• • This article introduces a theoretical framework and an empirical illustration designed to help individuals get on the right path.