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Eighty percent of retirement planning consists of worrying. In particular, worrying about money. When almost everyone is currently experiencing losses which negatively effect their retirement savings, it is hardly surprising.
Recently, a friend of mine who works as a private banker mentioned a client who came in for a review of his $146 million portfolio. A two-hour review became a rant over the client’s fear of becoming, surprisingly, homeless. “I sat there for two hours, listening to this guy talk about how he’s on his way to becoming destitute, and thinking that I have $60K in my 401(k). If he’s feeling this way, what am I supposed to do?”my friend exclaimed, clearly flustered from the peculiar situation.
Money and planning has become such a touchy subject for all of us. Rather than spend time stressing over how finances affect our life, perhaps we must ask ourselves how to overcome what feels like an unsolvable problem. I say, the question is: what can we learn from business and psychology that could help us handle both money and planning better?
A simple, but not obvious thing to learn from businesses is that they have developed tools that help deal with an uncertain future. One of the tools used by the modern business is scenario analysis, which simply means projecting the worst, neutral and best-case scenarios. Why look at all three? Because making your expectations explicit allows you to prepare for any outcome.
Let’s draw a parallel to our psychological needs. One of my favorite models of describing these needs is Abraham Maslow’s hierarchy of needs. Survival forms the base and foundation of this pyramid. Let’s translate that into a need for basic financial security. Above that, we find emotional needs. Let’s translate this into a need for financial prosperity –that extra cushion we like to spend on entertainment, travel, and other pursuits. Then, towards the top of the pyramid, there are abstract needs, such as freedom. This we will roughly equate to financial freedom, or our ability to realistically do or have anything we like.
Confusion between financial security, prosperity and freedom can prove extremely dangerous. If your rational mind cannot differentiate between them, then, subconsciously, you may treat any threat to financial freedom as a threat to survival.
Anyone who has ever lived on a tight budget knows that we do not actually need that much to survive. We might want it, we like it, but we do not actually need it. Knowing your baseline financial survival budget is an absolute must. It is the key to having a peace of mind when the inevitable fluctuations occur within your financial prosperity and freedom realms.
From this we find that defining a baseline financial survival budget is key to financial comfort. You may find it is easiest to do so on a scrap of paper, in excel or maybe in any budgeting software. It does not matter what tool you use, as long as your financial guidelines are clear regardless of how long it is after you have written them. The most important thing is clarity. Then, the sky will not be falling if your best-case scenario does not pan out, or when your $146M portfolio is down 20 per cent.
BOTTOM LINE FOR RETIREMENT PLANNING
Clarifying what financial security, financial prosperity and financial freedom mean to you will enhance your quality of life and should be a part of your retirement planning.
ABOUT JULIA VALENTINE
Julia Valentine is founder and CEO of Joy Compass, an essential retirement planning destination for people who want the second half of their life to be better than the first. JoyCompass.com contains resources on retirement planning, mentoring, a healthy lifestyle, motivation, quality of life and more. Julia Valentine is the author of Joy Compass: How to Make Your Retirement the Treasure of Your Life.