Most Retirement Planners Ask the Wrong Question

Many people within striking distance of retirement are focused on one question: what’s my number?

It centers around the idea of how much money you will need to have squirreled away by the date you stop working to continue to provide you with enough income for the rest of your life.

People should instead be focusing on the different question: “what’s my paycheck?” That is, they should be looking at the income they will be getting, rather than how they will be drawing down from the lump sum they've been accumulating. By asking the paycheck question they may be better off both emotionally and financially for several reasons.

When people spend their life building up a capital base, it makes them uneasy to see the balances of their investment accounts go down. While intellectually they may understand that this money was accumulated for this very purpose, it still may be difficult for them to watch the erosion of the capital base that they have spent their whole life building up.

The paycheck method solves this problem because you don’t think about the ups and downs of your capital base when you frame it as getting a regular monthly “salary.”

Even if you hit your lump sum number, you still need to plan for large one-time expenses such as a new car, your child’s wedding, or unexpected health expenses. Once you have hit this lump sum “number” of cash and not prepared for more, you will clutch it even tighter every time you have a major expense at home. But with the paycheck approach, you’ll plan your budget based on the money you will receive each month, and not focus on what you will need to take from your lump sum each month.