Insights + News + Advice

Insights + News + Advice


Quantifying your goals for retirement.

What are your goals for your retirement years? Travel the world? Buy a vacation home? Pursue your hobbies? Fund your grandchildren’s college expenses? As important as it is to identify your retirement goals, it is equally vital to get a clear sense of their cost. Once you quantify your goals, you can analyze whether your current saving and investment strategy has you on track to pursue those goals, or whether you need to adjust your plan.

Benefits of quantifying goals.

The process of quantifying your retirement goals takes some effort, but the payoff is definitely worth it. Regardless of where you currently are in your journey toward retirement, determining the cost of your goals delivers some powerful benefits, including:

  • Reduced stress. For many people, thinking about retirement provokes great anxiety. They have a sense that they will need a substantial amount of money to enjoy a comfortable retirement lifestyle, but, without having the specifics, they worry about falling short, and they may even feel powerless to do anything about it. Putting a “price tag” on your various retirement goals can bring them into focus and give you a greater sense of control. Once you know how much you’ll need, you can employ the appropriate investment strategies to work towards those dreams.
  • Improved financial decision-making. If you are married, you and your spouse may have different feelings about your prospects for retirement. Perhaps one of you is a worrier, while the other is more optimistic, certain that “everything will work out.” But if neither of you knows the true cost of your retirement goals, both of you could be prone to making poor financial decisions. To illustrate: If one spouse is deeply concerned about having adequate resources during your retirement years, that spouse may always be inclined to forgo opportunities, such as going on vacation, even if the family can afford it. Conversely, if one spouse is of the “everything will work out” school of thought, that spouse may consistently want to spend too much money, leading to real problems later on. But if you and your spouse have quantified the cost of those goals and analyzed whether you are on track towards affording them, you can base these discussions on hard numbers rather than gut feelings. This leads to more productive conversations and more informed decision-making.
  • Realistic expectations. You may well have some clear ideas of your retirement goals, and even think you know how much they might cost – but have you considered the total expense involved? For example, many people hope to purchase a vacation home when they retire, and they have in mind a number for how much they can spend on the down payment and monthly mortgage payments. However, they neglect to take into account all the other expenses associated with home ownership, such as taxes, insurance, and maintenance. But if you do a thorough job of quantifying the total costs associated with a second home—and all your other retirement goals—you can avoid unpleasant surprises down the road and map a route toward achieving these goals.

Of course, you might wonder how you can accurately pin down the costs of goals decades in advance. After all, even if you incorporate average inflation rates in your projection, you can’t forecast all the other factors that may affect the amount you’ll ultimately have to pay for your various retirement objectives. But having an estimate is definitely better than not having any idea of what the cost will be, and you can revise your estimate over time.

This estimate will be essential to you, because if you know how much you will need to accumulate, you can determine if you’re making adequate progress toward meeting that number. At least once a year, it’s a good idea to measure your progress against the targeted amount. If you aren’t on track, you essentially have two choices: you can adjust your investment strategy or you can be flexible with your goals. Let’s look at both these options.

Adjusting your investment strategy.

How might you adjust your investment strategy to help you work towards your goals? When appropriate, here are two paths you could follow:

  • Contribute more to your retirement accounts. Do you contribute the maximum amount each year to your IRA and your 401(k) or other employer-sponsored retirement plan? If not, and if you can afford to boost your contributions, you may want to do so, because these accounts are great ways to build retirement savings. Not only do they provide a wide range of investment options, but they also offer you significant tax advantages, such as tax-deferred growth of earnings. Of course, you might think it’s not that easy to find more money to put into your retirement accounts. But if your salary goes up each year, you could increase the amount you contribute to your 401(k) or similar plan. And when you get financial “windfalls,” such as a tax refund, you could invest the money in your IRA.
  • Invest more aggressively. Ultimately, how you invest can be just as important as how much you invest. Ideally, your investment mix should be largely based on your individual risk tolerance and your time horizon. Yet, if you seem to be falling behind in your progress toward your goals, you may want to consider investing more aggressively, possibly by increasing your allocation in equities. Such a move does involve a trade-off, though. To increase your growth potential, you will need to accept greater portfolio risk. Consequently, you will need to carefully evaluate your feelings about risk before adjusting your portfolio to a more aggressive position.

Contributing more to your retirement accounts and investing more aggressively are not mutually exclusive actions—you could do both, if your situation calls for it. It’s also important to note that your analysis may show that you are well ahead of schedule in reaching your goals, which is great news. In this case, you may want to consider adopting a more conservative investment strategy to eliminate unnecessary risk in your portfolio.

Be flexible with your goals– and prioritize them.

If you don’t feel comfortable increasing the contributions to your retirement accounts or taking on greater investment risk, does that mean you are destined to fall short of your retirement goals? Actually, the situation may not be all that dire. In case of a shortfall, you don’t have to abandon your plans – instead, you can modify them.

You may find that modifying your goals is much easier once you have properly prioritized them. Clearly, some of your goals will be more important than others—and the more crucial the goal, the less you’ll be able to compromise. To illustrate: One of your retirement objectives is, quite simply, to avoid outliving your money. This goal is “non-negotiable”—you must achieve it in its entirety, and it will likely be your highest priority.

But not all your goals will have this urgency. For example, suppose one of your retirement goals was to spend three months each year traveling. If it turned out that you could only afford to vacation for two months a year, would that be a total deal-breaker, or, more likely, just a mild disappointment? Or perhaps you hoped to pay for 100% of your grandchildren’s college education. If you can’t afford to do that, you may want to consider paying for the first two years of college or providing a partial “scholarship” to each grandchild of an amount that you can afford.

Helping you chart your course.

The process of quantifying the cost of your goals and then analyzing whether your current savings and investment strategy puts you on pace to reach those goal is not an easy one. In fact, it requires some fairly complex calculations and forecasting. For most people, it isn’t a do-it-yourself project.

At Leelyn Smith, we specialize in running these projections on behalf of our clients. We can help you articulate, prioritize, and quantify your goals. We can then evaluate your financial trajectory and help you consider your options for addressing any potential shortfalls.

We believe that retirement is your longest vacation, and, as with any journey, it’s important to have a firm idea of where you’re headed and a realistic itinerary for how you will get there. If you would like assistance in creating a roadmap to your goals, we are here to help.

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