Retirement planning
Encyclopedia
Retirement planning, in a financial context, refers to the allocation of finances for retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...

. This normally means the setting aside of money or other assets to obtain a steady income at retirement. The goal of retirement planning is to achieve financial independence
Financial independence
Financial independence is a term generally used to describe the state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities . In the case of many individuals whose financial circumstances fit this description, their assets generate income...

, so that the need to be gainfully employed is optional rather than a necessity.

The process of retirement planning aims to:
  1. Assess readiness-to-retire given a desired retirement age and lifestyle, i.e. whether one has enough money to retire; and
  2. Identify actions to improve readiness-to-retire.

Obtaining a financial plan

In recent years, producers such as a financial planner
Financial planner
A financial planner or personal financial planner is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes: cash flow management, education planning, retirement planning, investment planning, risk management and insurance...

 or financial adviser
Financial adviser
A financial adviser, is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension planning, and/or advice on life insurance and other insurances such as income protection insurance, critical illness...

 have been available to help clients develop retirement plans, where compensation is either fee-based or commissioned contingent on product sale. Such arrangement is sometimes viewed as conflicting to a consumer's interest to have advice rendered without bias or at cost that justifies value. Consumers can now elect a do it yourself
Do it yourself
Do it yourself is a term used to describe building, modifying, or repairing of something without the aid of experts or professionals...

 (DIY) approach, given the advent of a large, ever growing body of resources. For example, retirement web-tools in the form of simple calculator, mathematical model
Mathematical model
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used not only in the natural sciences and engineering disciplines A mathematical model is a...

 or decision support system
Decision support system
A decision support system is a computer-based information system that supports business or organizational decision-making activities. DSSs serve the management, operations, and planning levels of an organization and help to make decisions, which may be rapidly changing and not easily specified in...

 have appeared with greater frequency. A web-based tool that allows client to fully plan, without human intervention, might be considered a producer. A key motivation beyond the DIY trend is based on many of the same arguments of Lean manufacturing
Lean manufacturing
Lean manufacturing, lean enterprise, or lean production, often simply, "Lean," is a production practice that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination...

 process, a constructive alteration of the relationship between producer and consumer.

Modeling and Limitations

Retirement finances touch upon a motley of distinct subject areas or financial domains of client importance, including: investments (i.e. stocks, bonds, mutual funds); real estate; debt; taxes; cash flow (income and expense) analysis; insurance; defined benefits (e.g. social security, traditional pensions). From an analytic perspective, each domain can be formally characterized and modeled using a different class (computer science)
Class (computer science)
In object-oriented programming, a class is a construct that is used as a blueprint to create instances of itself – referred to as class instances, class objects, instance objects or simply objects. A class defines constituent members which enable these class instances to have state and behavior...

 representation, as defined by a domain's unique set of attributes and behaviors. Domain models require definition only at a level of abstraction necessary for decision analysis. Since planning is about the future, domains need to extend beyond current state description and address uncertainty, volatility, change dynamics (i.e. constancy or determinism
Determinism
Determinism is the general philosophical thesis that states that for everything that happens there are conditions such that, given them, nothing else could happen. There are many versions of this thesis. Each of them rests upon various alleged connections, and interdependencies of things and...

 is not assumed). Together, these factors raise significant challenges to any current producer claim of model predictability or certainty. Some might even adopt fatalism
Fatalism
Fatalism is a philosophical doctrine emphasizing the subjugation of all events or actions to fate.Fatalism generally refers to several of the following ideas:...

 -- that the full scope of client issues, non-financial included, render the entire problem indeterminate, unsolvable, and meaningless.

The Monte Carlo method

The Monte Carlo method
Monte Carlo method
Monte Carlo methods are a class of computational algorithms that rely on repeated random sampling to compute their results. Monte Carlo methods are often used in computer simulations of physical and mathematical systems...

 is a perhaps the most common form of a mathematical model
Mathematical model
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used not only in the natural sciences and engineering disciplines A mathematical model is a...

 that is applied to predict long-term investment behavior for a client's retirement planning. Its use helps to identify adequacy of client's investment to attain retirement readiness and to clarify strategic choices and actions. Yet, the investment domain is only financial domain and therefore is incomplete. Depending on client context and despite popular press, the investment domain may have very little importance in relation to a client's other domains - e.g. a client who is predisposed to the use of real estate as primary source of retirement funding.

Other models

Contemporary retirement planning models have yet to be validated in the sense that the models purport to project a future that has yet to manifest itself. The criticism with contemporary models are some of the same levied against Neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

. The critic argues that contemporary models may only have proven validity retrospectively, whereas it is the indeterminate future that needs solution. A more moderate school believes that retirement planning methods must further evolve by adopting a more robust and integrated set of tools from the field of complexity science.
The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
x
OK