Retirement Planning And the Economic Cycle of Life

Tommy Ferguson , CFA

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 Retirement Planning And the Economic Cycle of Life 

It has been said that retirement income comes from the “three-legged stool” of social security, retirement funds, and non-retirement savings.[1]  Social security is received by approximately 21 percent of the population and provides an average benefit of $1,544 per month or $18,526 per year. Retirement funds, which include pension plans, 401(k) plans, and IRAs, account for an estimated 32 percent of all household wealth. Non-retirement savings include stocks, bonds and investment funds held outside of retirement funds, and about 35 percent of adults hold them, according to a Pew survey.[2]  

While “the three-legged stool” is a convenient and quantifiable goal, it fails to quantify such factors as optimal cash flow and tax management strategies.  In addition, it overlooks perhaps the most valuable asset people have—their ability to earn income during their working years.  The concepts of total wealth and the economic life cycle can provide additional insight and may help people better accomplish their retirement savings goals.   


Quality of life in retirement depends to a large extent on accumulating wealth during working years.  But the factors that contribute to accumulating wealth, and even what constitutes wealth itself, have been the subject of much research.  For instance, it has long been recognized that total wealth includes health and education,[3] but actually incorporating these into retirement planning has been challenging.  This has changed in recent years.

Researchers have classified total wealth in four buckets of “capital”: human capital is the present value of an investor’s long term expected labor income, housing capital is the value of a home, pensions are the present value of private pensions and social security payments, and financial capital is the combination of investments and savings in taxable and retirement accounts.[4]  

The four forms of capital are the key components of our wealth over the course of our lives.


Each form of capital plays an important role in provision for living expenses at different periods in people’s.[5]  For example, a young worker in her 20s and 30s may have a relatively small amount in financial assets.  However, her human capital is high due to her health, skills and knowledge which will lead to the many years of future earnings that she expects.  So, she grows in her career and saves along the way.  Approaching retirement, her human capital will have been mostly “spent,” but her financial, housing and pension assets will have become the majority portion of her total wealth.    

The economic life cycle underscores the importance of saving during one’s working career, as financial capital replenishes the depletion of human capital.  Obviously, saving is critical for most people. A significant minority of adults—37 percent--say they could not afford an unexpected expense of $400.[6]  Despite the philosophy of some who believe we are saving too much and not spending enough, research has shown that non-savers tend to rely to a greater extent on high-cost services, have difficulty saving because of unexpected expenses, and struggle to make ends meet after significant financial shocks.[7]


Source: Derived from Blanchard and Straehl, p. 29.  For illustrative purposes only.


Another aspect of the economic life cycle is the greater likelihood that retirement necessitates a change in investment strategy.  This is because many new retirees have a unique set of needs: depleted human capital yet a potentially long time horizon, a need to withdraw savings rather than add to it, and a need to preserve wealth.  Thus, retirees often need growth, steady cash flow, and risk control.  

Controlling risk is particularly important in retirement due to longer life expectancies and retirees’ limited ability to replenish savings through work.  The financial industry is aware of this, and large financial firms have created many products that supposedly mitigate risk.  But history has shown that many of these products often come with significant costs and less than desirable results.  How can one actually mitigate portfolio risk without incurring high costs? 

Risk allocation, which is the amount investors have in growth and defensive assets (i.e. stocks and stock funds v. bonds, bond funds and cash), is one of the cheapest and most effective tools that investors have that they can use to help control risk.  Research suggests that, assuming full investment over market cycles, a more conservative investor with a moderate stock allocation may be able to earn nearly the same average return over time as a more aggressive investor with a higher stock allocation.[9] 

The wisdom of this strategy is intuitive; portfolios that do not go down as much in market troughs begin to compound positive returns from a higher base when the market turns around.  But this approach can only succeed if the investor sticks to his or her target allocation through the market cycle.


Clearly, there are many factors that have direct bearing on the quality of life people experience in retirement, such as lifetime earnings, saving, tax management, health, investment strategy, and more.  None of these factors are completely isolated from the others.  While arriving at the final answer to the question of how to retire comfortably is difficult, a great place to start is by asking the right questions.  Some questions to start with are:

  • Am I preparing myself physically for the season of retirement when inevitable health challenges come along?
  • Am I preparing financially for a long stretch of living without earning a traditional paycheck?
  • Do I know how to optimize the different tax costs of tapping various accounts for cash flow?
  • What about my heirs—have I made plans to take care of them?

As you can see there are many factors to consider when planning for retirement.  It is important to craft a flexible financial plan that can withstand changing and unexpected circumstances.  Here at The Mather Group, LLC (TMG) we have a team of experienced professionals to help guide you and your loved ones through this process.  Please feel free to reach out to your dedicated advisor with any questions or concerns you may have.



[1] Anna Crockett and Jason Saving, “Retirement Reality Check,” Federal Reserve Bank of Dallas, December 2020.


[3] Gary S. Becker, Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, 2d ed. New York: Columbia University Press for NBER, 1975.

[4] David M. Blanchard, CFA, and Philip U. Straehl, “No Portfolio is an Island,” Financial Analysts Journal 71, no. 3 (May/June 2015).

[5] Blanchard and Straehl, p. 16.



[8] Derived from Blanchard and Straehl, p. 29.  For illustrative purposes only.

[9]  Miccolis, Jerry, Gladys Chow, and Rohith Eggidi. 2015. “Quantifying the Value of Downside Protection.” Journal of Financial Planning 29 (1): 50-57.


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The Mather Group, LLC (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. For a detailed discussion of TMG and its investment advisory services and fees, see the firm’s Form ADV on file with the SEC at The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. All return figures shown are for illustrative purposes only. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice nor is it intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives. Past performance does not guarantee future results. 


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