Friday, January 18, 2008

Retirement Planning and Control Theory

Control theory, as it applies to math reads like this: The mathematical study of how to manipulate the parameters affecting the behavior of a system to produce the desired or optimal outcome. As it applies to you and me, it means getting the most out of what we have to work with.

In math, the calculations involved in understanding control theory, as Eduardo D. Sontag suggested in his book “Mathematical Control Theory: Deterministic Finite Dimensional Systems” is “geared toward an audience of mathematically mature undergraduate and graduate students”. Mr. Sontag is a professor at Rutgers University.

In our quest to plan of retirement, some of the principles used to determine control theory are also necessary for what we are attempting to do. Every retirement plan should seek to have optimal control, be subject to dynamic feedback, and be observable and stable.

I mention Orville and Wilbur Wright in the book with good reason. These two early aviators, while often being credited with being the first ones to fly, actually were not. Instead, they sought to give flight some measure of control.

Otto Lilienthal and Octave Chanute were the ones who designed the wings that allowed flight to happen. The ability of these designs, giving man the opportunity to defy gravity and fly, or glide worked to stimulate the two brother’s imaginations. Lilienthal died during a flight when his craft crashed in 1896. Both men had been able to achieve short flights of thirty seconds.

Otto Lilienthal

Octave Chanute

But those short flights were usually straight and somewhat level. The Wright brothers believed that flight needed to be more than simply elevation over a period of time. And as history tells us, the control they developed for the wings (actually two sets of wings) allowed the pilot to do more than just sit there. The two sets of wings were necessary to allow for wing warping and an elevator in the front of the craft allowed the pilot to make adjustments for pitch, or angle. This created a three-axis control.

Retirement planning, especially for those of us who are just beyond our youth, becomes incredibly difficult. While there are numerous influences that seem to act as a roadblock, one of the greatest problems middle-aged investor face is diversity.

A good plan is the sum of its parts. One by one, you need to gain control over your life, which is why the book methodically looks at not only who you are but who around you is influencing your decisions. While every one of us hails from different socioeconomic places, differs in race and ethnicity, has perhaps chosen a different career, we are all on the same path.

Gaining control is essential in creating diversity in your investments. Without it, you may fall behind.

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