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Retirement Planning and the Hierarchy of Financial Priorities

Many factors make preparing financially for retirement planning complicated. A recent blog post posits that there is a hierarchy to competing financial concerns, and understanding that hierarchy can help one to better — and more effectively — prepare for and finance retirement.

In “Behavioral Biases and the Hierarchy of Retirement Needs” Michael Kitces argues that “we tend to ‘mentally account’ for money into various buckets of current income, current assets, and (assets for) future income.” Further, he says, “the way we mentally account for income and assets also has an intrinsic hierarchy of priorities — first, we need to cover our current income needs, then our current assets, and finally our savings towards future income needs.”

But there is a fly in the ointment, says Kitces. He says that the “biggest caveat” to this hierarchy is that future retirees “may feel compelled to save more for retirement than they actually need.” And the feeling that they do not have enough may persist, Kitces says if they cannot achieve the need for future income until they are satisfied that their need for current assets has been met.

Bucket Brigade

Kitces says that the “classic” way that this hierarchy is applied divides retirement assets into three buckets:

Short term: covering the next few years of spending (invested in cash)
Intermediate term: covering the next 5-10 years of spending (invested in bonds)
Long-term: covering spending during the time beyond those years (invested into equities).

“Notably,” says Kitces, “such bucketing strategies don’t necessarily produce a materially different asset allocation than a classic diversified balanced portfolio.”

Another approach, Kitces notes, is to divide spending into categories over time into essential and discretionary expenses and then make allocations to “appropriately match the buckets.”

Big Concerns

Kitces writes that while it’s “long been observed” that prospective retirees’ top concern is that they will have insufficient funds for retirement or will outlive their retirement funds. Part of the problem, he says, is that this fear can motivate investments and financial strategies that can contribute to that very fear becoming a reality.

In light of research, Kitces says, this is because “even if we fear a shortfall of future income, we’re not willing to give up the liquidity of current assets to secure it, because having sufficient current assets is a required foundation first.”


If future retirees what to have what they need for retirement income as well as additional liquid assets, Kitces says, “they will cumulatively want more than they actually need.” Not only that, he argues, the desire for rising income during retirement — which he calls the “as good as it gets syndrome” — exacerbates the situation.

That, he says, flies in the face of research that found that retirees spend less the older they get. “In other words,” Kitces says, “even though we probably need less in assets to cover declining future income needs, we want even more to satisfy a desire for upside potential even if we won’t likely end up needing or using it.”

What To Do?

Kitces argues that the hierarchy suggests that retirement income strategies should be adjusted around their capacity to answer three questions:

1. What is the source of my current income?
2. Do I have a reasonable base of liquid current assets, even if it is irrationally sized?
3. How am I funding or securing my future income, and am I doing so in a manner that can still grow?

And he adds that financial planners should remember that clients may not be content to focus on the third questions unto the first two are answered to their satisfaction.