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Goals-based What?

Retirement Planning College Planning Investment Management Tax Planning

Goals-Based Investing-Isn't all investing "goals-based"?

Financial Planning, Investing, Retirement Planning 

If people aren't investing with goals in mind, what are they doing?  It's obvious that goals should underpin all of the investing we do. You should have a goal in mind before setting asset allocation and miles ahead of picking investments. 

All too often, investors operate with an amorphous goal of "amassing wealth" rather than thinking through the specifics of what they'd like to accomplish. Without clearly articulated goals, it's impossible to know how much you should be saving and investing, or how long you'll need to do so. 

To help turn your financial dreams into something that you may actually be able to achieve, it's crucial to quantify them, set a timeline for them, and prioritize them, assuming you have more goals that you can invest for at the moment. 

  1. Articulate Your Goals and Segment by Time Horizon- Step one is to think through all of the financial goals you'd like to achieve, big and small, short-term and very long-term.  Be sure to include debt paydown as a goal if applicable. Corners can help you with goal-planning worksheets so you can document your various goals. Next, set a time horizon on each goal and set checkpoints during the year to check progress and make adjustments along the way. 
  2. Quantify Your Goals- Step two is determine how much each goal will cost. The big wild card in longer-term planning is inflation. While inflation is currently low by historical standards, it's prudent to assume at least 2-3% inflation rate on goals. Consider a higher rate for college and future medical costs (like long-term care claims) which are running closer to 5-6% based on recent data. Retirement is by far the trickiest goal to quantify. Corners will help you stress test your retirement projections by using multiple inflation, tax, and other risk factors to help you stay on track within glide paths. Our approach to asset location which aims to lower your taxes on retirement savings by keeping the highest-tax assets in tax-advantaged account types and the lower-tax assets in taxable accounts. 
  3. Assess Funding Status- In step 3 you can turn your attention to how much progress you've made so far and what steps you need to take to make them a reality. Calculators and Monte Carlo simulations make quick work to help gauge retirement and college savings. There are two main ways to move the needle:  increasing contributions and investment returns you expect to earn. Be cautious when plugging in return expectations for goals and keep return estimates reasonable. We believe it's best to err on the conservative side and by using multiple account types you can repurpose dollars to another goal once you've created a margin of safety on the main goals. 
  4. Prioritize Them - The final step is to rank your goals and consider how they may overlap with each other. Be sure to factor in flexibility in funding. For example, your child may be able to rely on external sources such as loans to pay for college, but you'll have no such options for your own retirement. Besides retirement and college goals, we place high priority on having a Safety Net goal. It's slightly different from other goals because we assume the money may never be needed- but when it is, we assume a substantial portion of the balance will be liquidated all at once. We may recommend holding 40% stocks and 60% bonds which is expected to grow faster than inflation, but could withstand withdrawals if needed. Thus we recommend adding a 30% buffer to the savings balance to preserve the minimum balance you need to have available. Of course, we can personalize this allocation to whatever risk tolerance you're comfortable with. 

The following hierarchy will make sense in many different situations:

  1. High-interest debt paydown/build emergency fund 
  2. Retirement Savings 
  3. College Savings 
  4. Other short and intermediate-term goals 

In closing, Corners will work with you to develop S.M.A.R.T goals (Specific, Measurable, Achievable, Relevant, Time bound) 

Make your goal specific 

A specific goal is one with a clear description and a well-articulated set of circumstances. For example, if you're saving for a child's college education, a goal that is specific might look like the following on paper: "My goal is to pay for 50% of my child's total higher education costs"  (this assumes the child is responsible for the balance, i.e scholarships, loans, work) 

By stating how many of the possible education costs you're planning to pay for (i.e. "total"), the goal statement above provides much more information about the size and shape of the future expenditure. 

Make your goal measurable 

Making a goal measurable means that you can tell how close you are to achieving the goal using numbers. Generally, this means quantifying the specific information you know about- setting an accurate estimate of the total of the expenditure you expect to make. Here's an example:  "My goal is to save $400,000 to pay 50% for all three of my children's total higher education costs." 

The total expenditure should account for all the factors that went into making your goal specific, but it should turn the various social and philosophical decisions you've made about your goal into a numerical sum. You should also account for taxes in setting a precise, measurable goal. 

Ensure your goal is attainable 

As you define a specific and measurable goal, you should make sure it's actually attainable. Attainable goals are future expenditures you actually have the capability to achieve. For instance, if you make $40,000 in a year, saving $400,000 over five years is not attainable because even if you could save 100% of your income, you'd still come up short of your goal amount. 

Consider whether your goal is realistic

A goal is realistic if you have the time, resources, and discipline to achieve it. Generally, your goals will only be realistic if you take into account the other goals you have in your life. For example, when saving for college education, you probably will also need to invest for your retirement. If you don't align and prioritize your goals, you may end up being less able to save as regularly or as much as you'd like- which lowers your chances of achieving either goal. 

Any goal should be time-limited 

The last step in developing a S.M.A.R.T goal is to make sure the goal is time-limited --i.e.  Every goal needs a deadline or target date. Just as measurable goals quantify the total expenditure you expect to make, time-limited goals quantify the time you have to reach that expenditure amount. In most cases, you should try to set goals as far in advance as possible. For instance, rather than waiting until you have three children that will be going to college, it's a good idea to start saving as soon as you start planning a family. 

A time-limited goal should also consider how frequently you can plan to contribute to the goal. Will you save a portion of every paycheck? Or will you save just once a year? An effective time-limited goal might read like the following:

"My goal is to save a total of $400,000 over 18 years (by [due date]) to pay for all three of my children's total higher education costs by putting aside at least $500 per paycheck per month."

Map Out Your Financial Picture

By using a framework like the S.M.A.R.T approach to set each of your investment goals, you'll push yourself to think broadly about all the factors of life that affect your financial future while ensuring each and every goal is quantifiable and feasible. 

Remember that it's okay to use estimates or set educated guesses when creating goals you're not quote sure of. In many cases, such as retirement or college savings, you need additional research and external resources to predict how much money you'll actually need to reach all the specific criteria of your goal. In getting started saving for a goal, it's always better to be approximately right then to have no goal at all. 

If you set reasonable, customizable goals using the goals using the goal types available to you with Corners Financial Planning, you'll get savings and investment advice on each of the building blocks of a solid financial plan. We'll walk you through identifying your goals and visualizing your financial future.