Life’s long and winding road generally includes plenty of side trips on the way to a comfortable retirement. There may be homes to buy, children to raise and educate, careers to pursue, a vacation here and there … our list of needs and wants sometimes seems to stretch to the horizon.
Of course, all these objectives have something in common – they take money. And while it can feel overwhelming, breaking everything down into manageable pieces will give you a much better idea of how to deal with the inevitable tradeoffs and achieve your personal goals.
If you’ve been investing for a while, you probably already understand that financial planning is often about tradeoffs. The same idea holds true when prioritizing goals. We’re constantly juggling multiple financial goals at every stage of our lives, so it’s hard to figure out which is the most important right now. Also, our objectives evolve with the years. One way to get a handle on all that is to group your goals into needs, wants and wishes, then categorize them by when you want to achieve them – short-term (one to five years), intermediate (six to 15 years), and long-term (15 years or more).
Your goals also will have a cost dimension. Attaching time horizons and estimated costs (don’t forget inflation) to each goal will help you decide how to save and invest in order to achieve them. Last but not least, your goals must be ranked. Because sometimes, two short-term goals will compete so you’ll have to decide which gets your attention – and resources – first.
Although your short-term goals naturally will get your immediate attention, it’s a mistake to put off planning for longer-term objectives. You need to invest for longer-term goals now so your money has time to grow. Only you can identify what really matters to you and what tradeoffs you’re willing to make.
As you go through life, you’ll likely be forced to prioritize one competing goal over another. So how do you choose? It’s a matter of prioritizing and looking at the long-term impact of your decisions. Because the financial choices – both big and small – that we make every day should align with the goals and dreams we have for the future. Here’s a look at what we mean.
It’s a fact; tuition costs are rising. Parents and grandparents are using their own money to supplement the scholarships, grants and loans of their students. While those familial sacrifices seem noble, is it really worth delaying your own retirement?
Your financial advisor will tell you to think of yourself first. Surveys show that seven of every 10 American parents don’t feel financially prepared for retirement. You don’t want to be one of them.
Your child can turn to some combination of scholarships, loans, grants and part-time jobs to fund an education. But there is no financial aid when it comes to retirement. You’ll have Social Security, your employer-sponsored savings plans and any other assets you’ve reserved for retirement.
Of course, the college/retirement decision doesn’t have to be all or nothing. You can increase your chances of being prepared for both by:
When will your child start college? What age do you plan to retire? Are you thinking private or public school? What expenses will you face when you’re no longer working full time? What about health insurance?
Perhaps you have money saved for another goal that could be deployed toward these two top priorities. Talk to grandparents and other loved ones about gifting college funds during special celebrations. That money will add up over the years.
Once you have an idea of what you want to accomplish, and what resources you’ll have to help, think about ways to fill in the gaps. Your advisor can help you find ways to set aside funds in tax-efficient savings vehicles that could give you a better shot at both.
On a base level, this choice seems obvious, too, but it means you’ll have to cut back on dinners out, possibly vacations, and cable bills. It’s easy to ignore these small expenses when wrestling with competing financial demands. Changing day-to-day spending habits can make a significant difference, especially in your younger years when savings have more time to grow. Small expenses do add up, and it’s among the discretionary expenses where we really have room to economize.
To figure out where you can make cuts and where you can splurge, start with the basics. Create a budget by tracking your regular income and essential and discretionary expenses diligently for at least three months. Remember to allow for expenses that crop up less frequently. Your budget forms the foundation for everything else, so be sure to get it right (and to follow it after you’ve refined it). Your everyday expenses have to be less than your income if you’re going to be able to save for the future.
When you do find some extra cash among your everyday expenses, how can you figure out the best use for it? Sure, contributing to your retirement accounts is a great use for the extra funds, but so is paying off non-constructive debt. Excessive or high-interest debt stretches you financially and chances are it stresses you out emotionally, too.
Some experts suggest using extra cash first to contribute enough to realize at least the maximum employer match to your retirement accounts. Anything leftover should go toward paying down high-interest debt. This may mean adjusting your lifestyle, spending less and saving more. Once the debt is paid, use the earmarked-funds to create or build up your rainy day fund. Achieving both of these goals takes commitment and discipline, but the results will be worth it.
It might also be worth it to delay your retirement date in favor of funding a richer retirement lifestyle. Many of us dream of retiring as soon as possible, but delaying – even by one year – has calculable benefits. While your Social Security benefits shouldn’t be your only source of retirement income, they do provide a good base. Waiting until your full retirement age or even longer, say age 70, permanently increases the amount of benefits you’ll receive – up to 8% more each year. Delaying your retirement also means your investments will have a few more years to go, and you’ll have a few less years to draw down your savings.
You’re also generally not eligible for Medicare if you’re under 65. Keep that in mind if you’re considering retiring early. You’ll have to fund health insurance in some other way until your 65th birthday.
Know, too, that you don’t have to give up enjoying a retirement-like lifestyle, even if you’re still working. You’ll be generating more income during peak earning years, so you should be able to add in travel and other activities before officially retiring.
Tradeoffs aren’t limited to just these broad scenarios, nor are they always purely financial. The fact is life is a series of small and large decisions. Contrary to what some people might say, we generally don’t get to have it all – the point is to make intelligent, informed decisions rather than being forced into bad choices because we’re running out of time and/or money.
Remember, goal planning is dynamic – changing one piece affects the balance of the rest. While tradeoffs can be tough, it helps to think about them holistically, so you don’t drop the ball when you find yourself juggling multiple priorities.