By Massi De Santis

One of my children reminded me of an efficient way to solve a maze: work back from the end to the start. In economics, we use a similar approach to solve planning and strategy problems, called backward induction. Backward induction is a process that starts from the end of a problem and works back in time to determine the sequence of optimal actions, a plan. The process can be applied to solve virtually all problems in finance, including portfolio selection and savings versus consumption decisions.

Applied to retirement planning, backward induction means that to design a good retirement plan, you need to start from what successful retirement means to you. Assume you are there. What does success look like?

Retirement planning questions like How much do I need to save? How much of my current income should I replace? And How much can I safely spend from my savings each month? all need to start with your end goal. Only by defining your goals you can create a strategy to achieve them.

Start with Goals Meaningful to You

The first thing I ask my retirement planning clients is this: “What does a successful retirement look like to you?” Usually, when someone is serious about retirement planning, they know what is important in life to them.