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 with a few working years to go there is little that can be done if an individual is not on the right path; and 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 the individual to consider all the relevant variables at the beginning of his journey; and enables him to start saving early to build a target portfolio specifically designed 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.

Keywords: Retirement planning; financial planning; Monte Carlo

JEL Classification: G11