3 Mental Models For Retirement Planning

Sit down to begin working on your retirement plans, and you’ll quickly realize that there are a number of decisions to be made. While tactical steps like whether to do a Roth conversion or the proper age to begin taking Social Security tend to steal the limelight, one of the best places to start your plan is improving the quality of your decisions. Here’s where mental models can help.

Better decisions = better plan = better life (hopefully).

Now, I love reading about this kind of stuff and tend to geek out on the subject of decision-making, so I will try not to stray too far down the rabbit hole (though if that’s your thing too, you can explore the subject in more detail with past episodes from my Retirement Answer Man podcast). Here are three useful mental models to consider as you embark on your retirement planning journey, borrowed from Shane Parrish’s The Great Mental Models Volume 1.

Inversion

Our first model is inversion, which involves thinking about problems or goals by considering their opposite. It flips the question. In our agile planning process, the first step is always to establish a vision of what you want in retirement. But guess what? Figuring out what you want can be really hard! So, we can use inversion when considering vision. Instead of “What do I want?” think, “What do I not want?” Ruling out options helps narrow the field so you can hone in on what matters most to you in your next chapter.

Maybe you aren’t sure where you’d like to live in retirement. But you know you don’t want to be an airplane ride away from your grandchildren. Or that you’re tired of facing triple-digit heat every summer. Or that you don’t want to be in a rural area that lacks the city amenities you’re accustomed to enjoying. Those essential filters can help you identify the right choice for your life and retirement.

You can apply inversion in another way to your planning process. Instead of asking, “What should I do to have more confidence in my retirement plans?” think, “What do I need to avoid so I can have more confidence?” Maybe that’s the 24-hour news cycle. Maybe it’s checking your account returns every single day. Maybe it’s comparing your plan for your unique life in retirement to your neighbor’s, your coworker’s, or your annoyingly successful older sibling’s.

Second-Order Thinking

Our next model is second-order thinking, also known as the law of unintended consequences. Second-order thinking helps us understand a decision’s true impact, which can be critical for long-term planning.

For example, say you buy a lakehouse in retirement. The immediate result is that you have a great place to enjoy with your family! Win!

Unintended consequences might be that the house must be furnished and maintained or that you feel like you must now spend vacations at the lake, so you skip other trips. Now that you’re on a lake, you may want to buy a boat, a Jetski, and other water toys, all of which you must maintain. Before you know it, the initial price tag of purchasing the lakehouse has bloomed into other related expenses.

How do you practically use this model when making decisions? Be aware of longer-term consequences, and don’t just look at immediate ones. The easiest way to accomplish this is to ask yourself the question over and over again, “And then what?”

And then what? And then what? Exploring the answers will help you tease out downstream consequences so you can see more of the picture of the position you’re going to be in, good or bad.

Map vs. Territory

A map is a model of reality. It simplifies things to reduce complexity so that we can more easily make decisions. However, believing that the map is the same as the territory you are navigating can be harmful or even dangerous. Our third mental model, the map vs. the territory, helps us appreciate that retirement plans, like maps, are an abstraction, too.

A map is a handy tool, but it’s just that, a tool. When creating a map, there are a few questions to ask yourself.

1. How detailed does the map need to be in order to be useful?
2. What is the feedback process for updating the map?
3. What are the values and limitations of the map creator?

Your retirement plan is a much-needed map for navigating and rocking retirement. Alas, like all maps, your plan has limitations. In January 2023, we conducted a case study with Rosie, a listener who volunteered to participate in our Retirement Plan Live series. The Monte Carlo scenario run by her financial advisor said that statistically, her plan provided a viable direction for her to go. However, the map needed to be more detailed and make her plan resilient to market events. When a bad market happened, her plan—her map—suddenly became treacherous and no longer worked out mathematically. However, they kept following the original plan rather than adjusting their course in response to the current conditions in the territory, making it likely that Rosie would not have enough money to maintain her lifestyle in retirement.

Maps only have some of the answers. Therein lies the danger. Being an expert at reading a map is different from navigating reality. Focusing too much on the map can reduce our ability to adapt if we don’t allow what’s happening in the territory to influence our plans. In our agile planning process, we try to mix the two in a healthy way and allow walking the journey to impact the plan so that we can pivot if needed.

Being aware of your thinking processes and decision frameworks can significantly impact the success of your retirement plans. Incorporate mental models like inversion, second-order thinking, and the map vs. the territory to shed light on problem areas, identify opportunities, and pare down overwhelming options when you feel stuck. Think smart, retire smarter, and you’ll be ready to rock your retirement!