Money Matters: Avoid Getting 'Sandwiched' Out of Retirement (eBook)

Chapter One - Goal Setting

“Setting Goals is the First Step in Turning the Invisible into the Visible”

– Tony Robbins

My favorite topic of conversation is goal setting with clients. Everyone comes from such diverse backgrounds and has different life goals and missions; goal setting is one of the best parts of my job. I like to tell people that I help them align their resources to make their dreams come true. The first step is defining what those dreams are! This is the part of the process where the money takes on a new form, and it is possible to dream big and still be practical about it. I love asking people fun questions at parties such as, “So, what financial goals do you have for the future?” – yes, that is correct, I am THAT guest! But it always amuses me how often people will dismiss money as part of their goals. Traditional answers range from “Oh no, I don’t care about money, I just want to be happy” to “I just want to pay off the mortgage and send the kids to college.” Later in the night, I will occasionally get the more honest answers, such as, “Well, I would love enough money to buy a jet and never have to work again.” A particular favorite of mine is, “I would love to be able to afford to get divorced, but that’s just not happening!” What an interesting approach to life – no judgment here or anything!

It does not matter what your goals are for the future; they all have a price tag. Even if you want to go all ‘Eat Pray Love’ on your life and move to an ashram in India, you will still need to pay for your airfare. At that point, I would also strongly advise you to save up some money for medical expenses if you return in three years with a calcium deficiency.

So why is it that people shudder at the thought of putting a price on their goals? Why are we so afraid to talk about how much money we believe we need to live our dreams? The answer is simple: we never really thought about what it would cost. The best news: it probably costs less than you think.

Financial Goal Buckets

Sharing joint goals for the future is the key to financial success and a happy marriage. It is essential to establish these goals and work together to create a plan. Raising a family at the same time as progressing in your own lives can leave little room for daydreaming or goal setting, but if you start to see this as a vital part of your financial planning process, you may just be surprised at what is possible! It is hard to judge yourself against others regarding where you should be with your savings because everyone is in a different situation, and there is no one-size-fits-all when it comes to saving for your financial freedom. In my first book, I used the following rough guide to help benchmark where you should expect to be in terms of your savings by a certain age. Please note this is just a guide and not intended to discourage or scare you.

Ideal savings by age bracket:

• 30 years old - one year’s salary in savings
• 35 years old - two years’ salary in savings
• 40 years old - three years’ salary in savings
• 50 years old - six years’ salary in savings
• 60 years old - eight years’ salary in savings
• Retirement age - ten years’ salary in savings

In other words, if you are 40 years old and make $100,000 per year, your total accumulated savings should be around $300,000 to be on track for retiring at around age 65. If you plan to stop working sooner than that, you will need to have substantially more savings. If you are looking at this and your instinct is to roll your eyes because you are nowhere close to the target – do not worry – and keep reading! There is plenty of time to catch up and make adjustments so that you can get back on track and even ahead of the curve.

Now, retirement savings is just one piece of the puzzle. If you are currently 32 years old, the idea that you need to focus a lot of time or energy on saving towards something 35 years away may seem a bit pie in the sky. Of course, you need to plan for your short-term goals and everything that will likely happen between now and retirement. How and where you save your money and how it should be allocated or invested depends on how far away the target goal is. We can use a bucket strategy to structure goal planning and ensure that you are also planning for those unexpected twists and turns that life is sure to throw your way. Consider each bucket as a metaphor for a different type of savings strategy:

• Short Term
• Medium Term
• Long Term

Short Term - Bucket One

For the first bucket, we want to consider your short-term goals – this could be minor home improvements, international travel, or maybe something practical like paying off student loans or clearing your credit card debt. Anything that you can achieve within one to three years is considered short-term goal setting. Ideally, you would like to have close to one year’s salary in this bucket, but at a minimum, endeavor to have six months of expenses in highly liquid investment vehicles such as savings accounts, cash, or short-term bonds. This ensures you can cover your basic expenses and any planned “treats” you have during that time. Remember that while it is important to identify these short-term needs, it is also important not to be too conservative when thinking about your cash needs. Interest income will play a significant role in your portfolio growth over a long period of time. When you hold too much money in cash and other highly liquid products, it can create a drag on your investments and create an inflation risk. Currently, inflation is at around two percent per year, which means you need to at least earn two percent from your holdings each year to keep pace with inflation; otherwise, you are losing money.

Medium Term - Bucket Two

Medium-term goal setting usually involves slightly larger goals that should take around three to ten years to achieve. These objectives may include having children, setting up your own business, or achieving specific saving and investing milestones. This bucket of savings should be focused on capital retention and consistent growth, as any significant risk or volatility could easily derail your plans within a one-to-five-year period. Keep in mind that you want to be able to access these savings within a reasonable time frame. Be clear on your goals or anticipated expenditure when you start saving to ensure you do not need to dip into these accounts for short-term needs. Consider the liquidity of the investments you put into this bucket. As your medium-term goals get closer, you need to be able to access the funds without any penalties.

Longer-Term - Bucket Three

For longer-term goal setting, we should consider a timeline of ten years or more. These goals include significant life events such as retirement, children going to college, estate planning, and more. With a longer time horizon, you can afford to take more risk with your investments if that suits your investing profile, and you can also take advantage of the benefits of keeping your money in one place for longer. As you consider what your goals might be over the next ten, twenty, thirty, or more years, it is prudent to consider whether these goals might change. For instance, specific goals, such as retirement, likely occur in a window of time, age 62-67 or so. Other goals might be more fluid. You might consider a mid-life career change or decide to go back to school at some point. Take some time to note down the potential changes that you can foresee happening in your life over a longer period of time to plan for them appropriately. Even if retirement seems far away today, there will likely be a time in your life when you are not working and need to live off of your investments or some type of passive income.

The magic of financial planning and investing is to start as early as possible. It is much easier to start saving towards retirement at age 35 than it is at age 55. Way too often for comfort, I receive calls from people who did not appropriately plan for their retirement. They call me when they are 63 years old, with insufficient funds accumulated, and ask me what they can do investment-wise to retire in the next 12 months. It is usually a discussion focusing on the need to cut down their expenses if they really want to retire that soon. That is always a terrible conversation to have, and if you start sooner rather than later, it is much more accessible to retire at your planned retirement age or even earlier!

For every stage of life, there are financial goals and aspirations to aim for, as well as financial constraints and considerations to be aware of. Saving for a rainy day is always a good idea, and this is especially true as you move into the later stages of life. Complexity is added to our lives with spouses, children, and parents, making financial planning a necessity. Of course, finances are not the only component of successful goal setting, and you want to work with your partner to create a strong vision of the married life you both want to have. Once you are clear on your life goals, you can then work backward to ensure that you have a solid financial plan in place as to how you will achieve them. Different goals will...