Most employees have a hard time grasping all the dimensions of retirement planning. Before people can make rational retirement choices, they must first "see" the retirement problem in its totality.

A visual aid I use to help people understand the questions and tradeoffs in retirement planning is a retirement triangle.

Individuals must address six savings and retirement questions:

1. When should I begin to save and invest for retirement?

2. How much do I need to save yearly for retirement and how should I invest my savings?

3. How much financial wealth do I need to retire?

4. What age should I retire?

5. Once I retire, how much can I afford to pay myself yearly?

6. What is my life expectancy?

The answer to the first question is simple enough: Begin saving for retirement as young as possible.

Answers to questions two through five are often mechanically given as 10% to 20% of your salary in a well-diversified portfolio; retire when you have accumulated enough wealth to provide somewhere between 60% and100% of your current take-home pay (adjusted for expected Social Security payments and inflation); and you can pay yourself around 4% to 5% of your accumulated wealth yearly.

To question six, life insurance companies provide us with a life expectancy given personal background information.

While this information is useful, it doesn't allow employees to "see" how these six questions hang together and how an answer to one question potentially affects answers to other questions. Good decision-making is all about trade-offs.

A retirement triangle allows individuals to visualize how retirement questions relate to each other and the impacts of their choices.

This particular triangle is for a person who begins to save at 21 and has a life expectancy of 85 years. It captures all six questions and their answers beginning with "Start Saving" age and ending with "End of Life."

This visual aid offers the possibility of presenting employees with a richer story than the quick rules-of-thumb often presented as serious financial advice.

Before illustrating the triangle's use, you have to understand each of its arms. The line connecting points 1 through 3 measures (in years) the difference between "End of Life" and "Start Saving."

In the illustration here, it equals 64 years, divided into work and retirement periods. The line from 1 to 2 shows the "Accumulation Phase" during which someone saves. The rate of the line's rise reflects necessary saving and risk exposure to reach "Targeted Retirement Wealth."

Assuming a constant level of risk exposure, a steepening of this line means greater yearly savings, and a flattening, the opposite.

The line from 2 to 3 represents the "Decumulation Phase", which is the drawing down of retirement wealth during retirement.

The steepness of that line measures how much you pay yourself yearly from "Targeted Retirement Wealth." A faster falling line infers greater payouts, and a flatter line, smaller ones.

The triangle's most important insight, shown visually, is that the answer to any one of the six retirement questions potentially affects answers to the other five.

Changing any one of the points 1-2-3 or changing the steepness of the lines between 1 and 2 or 2 and 3 impacts other parts of the triangle that correspond to other questions.

Take the case of an employee who waits on starting a retirement savings program. This shifts point 1 to the right. If "Targeted Wealth at Retirement" and retirement age remain constant then the line connecting points 1 and 2 steepens or rises more rapidly. This means required yearly savings and/or risk exposure must increase.

Assume everything in the triangle stays the same except life expectancy, which increases. Then point 3 moves right. The line between 2 and 3 now falls at a slower rate or flattens out.

This means lower retirement payouts. What can you do to offset this change? Different options exist. Point 2 or "Targeted Retirement Wealth" can be increased (i.e., moved straight up), which requires additional savings (so the line between 1 and 2 steepens); or retirement age can be extended which moves point 2 east; or some combination of both strategies. This is exactly the type of trade-off reasoning necessary to make retirement decisions.

Nonsequential reasoning

Most people, when thinking about retirement, sequentially reason 1-2-3. I encourage people to use backward induction, visually presented in the triangle as a 3-2-1 reasoning process.

For example, begin with your expected age at death and planned retirement age. Let's say 85 and 65, respectively. Ignoring for a moment Social Security and inflation, this means you'll need sufficient wealth to sustain you for 20 years.

Say you want $50,000 a year in income during retirement and for every dollar of your retirement wealth, you can safely remove 5 cents of income per year. How much wealth will you need at retirement?

You'll require approximately $1,000,000 (multiply $50,000 by 20). Given your current age and some reasonable assumed portfolio return, your yearly required savings is then calculated. Problem solved!

One reason people avoid planning their retirement is cognitive overload. Most people cannot grasp the retirement problem in its totality or see the connective tissue between its various parts.

Visual tools like the retirement triangle help people see the entire investment problem and allow them to evaluate how changing one part of the problem influences its other components.

Planning requires running "what if" scenarios. The investment triangle is an inexpensive tool to help your employees think about their retirement tradeoffs. .

Contributing Editor Mark Nadler is an economist and professor at Ashland University in Ashland, Ohio. He is a member of The Financial Education Co. and president of Vincuro, a financial stress reduction firm.

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