Book Exerpt: Planning

December 2nd, 2011 by Potato

This is perhaps one of the weakest sections of the book, since it largely tells you to just back-of-the-envelope it if you’re young, and to go visit a planner or read a dedicated planning book if you’re older. But it does give you a feel for the writing style, and if you like this, hey, you’re gonna love the book.

Putting together a plan is important: the plan will shape your investing/saving activities, so having a plan is obviously a must, but putting one together yourself (even if only very approximately) is also important because there are so many bad planners out there (mostly salescritters posing as advisors). If you rely on their plan you may be setting yourself up for disappointment, so it’s important to at least know if they can get you in the ballpark before you go to a “planner”.



It’s important to come up with a plan to guide your financial life. There are many factors to consider, including:

• how much you should save
• your return on investment
• how much you’ll need to spend per year in retirement
• your timelines (how long you have to save/invest, how long you have to support yourself after)
• other goals
• tax issues

For each be sure to consider a range: what if returns were 4%? 5%, 6%, 7%, 8%? Be sure to be realistic, as it does no good to come up with a plan that won’t even come close to a realistic return (as easy as retirement saving looks with a 20%/year return, it’s not realistic).

There’s a whole profession of financial planners out there with their own professional designation (CFP) with a host of detailed, complicated software tools that can account for different investment returns, inflation, taxes, etc. When you get closer to retirement (within a decade or two) then it may very well be worth paying a visit to one to draw up a detailed plan. But if you’re younger (20’s and 30’s) then the uncertainty of the future is so great that the details probably aren’t all that important: you can get close enough by yourself with a few minutes of careful thought and a spreadsheet.

Just try to save as much as you can get away with early on and you’ll set yourself up to be in fine shape by the time you’re ready to have a professional look at your situation.

Your investments are just one part of the overall plan, but the part that is really the focus of this book…


That’s exactly how it appears in the book. Now one of the objectives of the book was to keep things brief, and cover a lot of important topics. Here I’ve got a chance to perhaps reflect and expand and maybe even edit myself a bit. Recently Netbug asked “what should be in a plan?” So to make a convenient list:

  1. How much you should save.
    • Take the time to go through the exercise from both ends: starting from where do I want to end up, how much do I need to save to get there? And also starting from my current budget, how much can I save?
    • Remember that your savings rate likely won’t be the same through your whole life, and you can include that in your plan, though also remember that the more you do early on, the more effective those savings will be.
    • Don’t forget to stock that emergency fund!
  2. Your return on investment.
    • You’ll want to plan for several scenarios. Remember that you have basically no control over your investment returns.
    • Be realistic. Saving for a lavish retirement seems easy if you assume you’ll make 25%/year on your money, but 2.5% after inflation and taxes might be more realistic.
    • Also consider at this point your asset allocation and risk tolerance. If you have a low risk tolerance, you’ll likely also need to allow for a low return on investment.
    • Remember to use real returns, or to otherwise factor in inflation.
  3. How much you’ll need to spend per year in retirement.
    • A good starting point is how much you spend now (go back to that budget you made in step 1).
    • Don’t forget occasional big ticket items, like new cars, vacations, etc.
  4. Your timelines (how long you have to save/invest, how long you have to support yourself after).
  5. Other goals.
    • Saving up to go back to school, buy a car, a house, or whatever? These should also be part of your plan.
    • Do you want to die broke, or try to live off just the returns, leaving behind a large estate for your kids or charity?
  6. Tax issues.
    • Don’t forget to account for tax burdens when projecting out over the years. Also, where is it best to put your savings? TFSA vs RRSP, one spouse’s account vs the other?
    • But also don’t worry too much about taxes — they’re another level of complication, and they can’t be entirely avoided or deferred. Many people make bad investing and life decisions attempting to minimize taxes paid.

As for determining what to plan for each of those items, I’ll say that like many things in life, it’s a balancing act. You want to save enough that you’ll be supported in retirement, but not scrimp so much that you sacrifice your quality of life today. Though a hint: very few people hit retirement and say “oh darn, I saved too much!”

You’ll have very little control over many of the factors in your plan, and not much clarity over exact figures on the ones you can. Early on, like in your 20’s and 30’s, don’t worry too much about it: it’s more important to have the outline of a plan and to just get started than it is to have a binder of projections and precise scenarios prepared. As you get closer to retirement, you’ll want a more detailed plan, so in your 50’s it may be worth moving on from ballparking with a napkin and Excel to paying a planner. In fact, why not make a visit to a fee-only planner a 50th birthday gift for your friends and family?

And of course, sticking to a plan is important (more important than getting that plan perfect), and this flowchart by CPFB is relevant.

One Response to “Book Exerpt: Planning”

  1. Netbug Says:

    My plan involves the numbers 6, 49 and the words Max.