With the start of the college and pro football seasons upon us, coaches and players are in the process of setting goals for themselves and for their teams. On defense this may mean improving the number of yards allowed (I hope this is at the top of the list for my beloved Green Bay Packers). For the offense a goal might be to lower the number of quarterback sacks allowed by 20%.
Most of us dream of things we’d like to do in the future or perhaps what we would like our lives to become. When it comes to the world of financial planning, these aspirations need to be translated to goals in order to determine how best to achieve them.
One of the initial discussions most financial advisers have with a new client centers on the client’s goals for their money. Typical aspirations for clients might include funding their children’s education or saving for their own retirement. Goals might also center around a certain lifestyle, both now and perhaps later on during retirement. In order to translate these aspirations into goals, the following must be attached to these aspirations:
Set a time frame. A goal must have a time frame by which it needs to be achieved. For college, it is generally near the child’s 18th birthday. Retirement is typically at a certain age. If the time frame is open-ended, how will you know when the money is needed? How will you track your progress? How will you know how much you will need to save over time?
Over the course of time, the time frame for some goals might change. Retirement is a prime example. Perhaps you had planned on retirement at age 63, but your investments took a major hit during the 2008-09 market decline. You are now back on track, but new calculations tell you that age 66 is more realistic in terms of being able to generate the type of annual cash flow to support the lifestyle you’d like to enjoy during retirement.
Goals need to be quantified. It’s not enough for a football player to say they want to improve; they need to quantify what improvement means. For the college student-athlete this might mean improving their average yards per catch by 10% and improving their classroom GPA by half a grade point. Saving for retirement is the same. What is a comfortable retirement? How much will it take annually to fund a comfortable retirement? Start out by looking at your current level of savings, and try to quantify how much you will need annually to live comfortably in today’s dollars.
Take this annual amount and subtract things like a pension or social security that will provide you with monthly income. The balance is what you need to fund. Translate this “gap” into an amount that you need to accumulate by some date, and now you have a retirement accumulation goal that is quantified and has a time frame. Keep in mind you will also need to factor in the impact of inflation.
For example, you might determine that $1 million is needed in 20 years to fund your desired retirement lifestyle. Armed with this information, you can start looking at where you are and what you need to do to achieve your goals.
Monitor your progress. Establishing quantifiable, measurable financial goals with a set time frame is just the first step. Now for the real work. You need to monitor your progress on a regular basis, because things change. For instance, the stock market may rise or fall rapidly, you might lose your job, an illness could occur, or you might find yourself ahead of schedule in terms of the amount accumulated.
Adjust and adapt. It is important to monitor your progress and adjust your goals when needed. It is also not uncommon for goals to change over time. This is often because life changes. Are you expecting another child years after you thought you were done? Did you suffer a job loss? Get married? Get divorced? These and innumerable other situations arise in our lives. Curveballs like these can throw a wrench into the best laid financial plans.
While there are no guarantees that doing all of this will lead to achieving your financial goals, in my experience those who fail to plan their financial futures are simply planning for failure.
Remember: Financial planning is an ongoing process, not a one-time event.
Please feel free to contact me with your financial planning questions.
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