Our relationship with money starts at an early age when we notice family members exchanging coins or bills for all sorts of stuff we like. Money’s power and authority grow when we get our first allowance or paid chore. These early experiences foster habits and beliefs that last throughout your life. Its challenges multiply as we approach adulthood and are encouraged to take loans to pay for college or buy a car.
Parental figures set the tone for investment goals early in life, teaching us to delay gratification until we can break the piggy bank, allowing those coins to buy video games, clothes, or equipment. The intimate connection between investment and lifestyle grows more sophisticated as the years pass. The culmination of your working life is either a comfortable retirement or a struggle to make ends meet.
How Life and Investment Goals Intersect
Investment goals are spread into three branches depending on age, income, and outlook. Age can be further subdivided into three distinct segments: young and starting out; middle-aged and family building; and old and self-directed. These classifications often miss their marks at the appropriate age, with middle-agers looking at investments for the first time or elderly folks forced to rigorously budget, exercising the discipline they lacked as young adults.
Income provides the natural starting point for investment goals because you can’t invest what you don’t have. The first career job issues a wake-up call for many young people, forcing decisions about 401(k) contributions, savings or money market accounts, and lifestyle changes needed to balance growing affluence with delayed gratification. During this time, it’s common to run into problems, like getting stuck with high rent and car payments or forgetting that your parents no longer pay your monthly credit card bill.
The outlook describes the playing field on which we operate during our lifetimes and the choices we make that impact wealth management. Family planning resides at the top of the list for most people, with couples deciding how many kids they want, their preferred neighborhoods, and how many wage earners will be needed to match those goals. Career expectations dovetail into these calculations, with the highly educated ramping into years of increased earning power while others are stuck in dead-end jobs, forced to cut back to make ends meet.
Investment goals become moving targets for many individuals, with carefully laid-out plans running into roadblocks in the form of layoffs, unplanned pregnancies, health issues, and the need to care for aging parents. When choosing 401(k) allocations or how to spend a year-end bonus, it’s important to be realistic about these unexpected challenges. Many people ignore the old saying “save for a rainy day” until it’s too late.
Fortunately, it’s never too late to become an investor. You may be in your 40s before you realize that life is moving faster than expected, necessitating retirement planning. Fear can dominate your thinking if you wait this long to set investment goals, but that‘s OK if it adds a sense of urgency to wealth management. All investments start with the first dollar set aside for that purpose, whatever your age, income, or outlook. Of course, those investing for decades hold a major advantage, while their growing wealth allows them to enjoy the fruits of their saving habits.
Create a Workflow for Investment Goals.
Investment goals address three major themes regarding money and money management. First, they intersect with a life plan that engages our thought processes in unexpected ways. Second, they generate accountability, forcing us to review our progress on a periodic basis, invoking discipline when needed to stay on track. Third, they give us the motivation that can help our health and outlook on life in ways that aren’t related to money.
Once established, the investment plan forces you to think about sacrifices that need to be made and budgets that need to be balanced, with the understanding that delay or failure will have a direct and immediate impact on your wealth and lifestyle. This process makes you think about and plan for the future, so you can stop living from hand to mouth and make a list of the things you really care about.
Use monthly or quarterly statements to review progress and recommit to your chosen life plan, making small adjustments rather than big ones when cash flow improves or deteriorates. Review your annual returns periodically, and enjoy seeing your wealth grow without direct intervention or a holiday check from a relative. Learn to deal with losing periods like a grown-up. Use the red ink to teach yourself patience and think about how your choices may have led to those bad returns.
The Australian Investors Association recommends using the SMART format when setting investment goals. 1 Here are the elements:
- Make each goal distinct and specific.
- Measurable – frame each goal so you know when you’ve accomplished it.
- Achievable—you need to take practical action to achieve a goal.
- Determine whether your goals are relevant to your life and realistic.
- Time-based: assign a timeframe to each goal so you can track progress.
Start by writing a document or journal that lists each investment goal and how you’ll measure progress. List as much detail as possible, considering both short-term and long-term objectives. Let’s say you want to save for retirement but also plan to own a home in a safe neighborhood, with enough cash left over for an occasional vacation. Now review your current financial situation, noting how well you’ve handled money to this point and the steps you’re willing to take to achieve that list of goals.
It may be premature to consider the practical actions required or time frames needed to mark progress if your investment goals are unrealistic, outlandish, or don’t match your current or expected earnings power. You can dream about fulfilling life’s desires, but investment planning requires a brutal reality check before executing the needed action plan. Simply stated, if the plan doesn’t match your reality or your goals, throw it away and start over. Concentrate on baby steps rather than broad-brush daydreams.
A small 401(k) contribution may be all that’s needed to get the investment plan on track during its infancy. Employers sometimes match your contribution up to a certain level, which allows you to eventually think about more sophisticated planning. Financial advisors recommend you allocate the maximum allowed whenever possible, although that’s unrealistic for many young people just starting out in their careers. This is especially true for people born after 1990, who have a huge amount of debt from student loans.
Managing Time Frames
Break investment goals into short-, intermediate-, and long-term segments whenever possible, matching the natural life stages of youth, middle age, and post-retirement years. Aligning bank and brokerage accounts to short and intermediate terms also makes sense, while retirement accounts focus exclusively on the long term (stiff penalties are incurred when accessing those funds prematurely). In fact, there’s no good reason to tap into IRAs, SEPs, and other retirement accounts unless dire circumstances offer no viable alternative.
Short- and intermediate-term goals assist SMART planning as well, allowing a quick review to gauge savings progress for a home, automobile, vacation, or family obligations. Intermediate-term planning can also include a more generalized account, denoting the capital set aside for the inevitable “rainy day.” This emergency fund allocation can also serve as a firewall between life’s surprises and the much larger retirement account, allowing that capital to be left untouched and set to fulfill its intended purpose.
Don’t despair if you’ve reached middle age without investment planning because major benefits accrue quickly when the task is first undertaken. Of course, playing catch-up will be required if your finances are flashing red ink, necessitating lifestyle changes until your income matches or exceeds expenses. Debt management will be needed to get on the right track because it makes no sense to earn 5% or 10% annually in an investment account when multiple credit cards have hit their limits at 18%, 20%, or 25% interest rates.
Learning to invest in middle age has the benefit of experience – that is, you can more accurately gauge your future earnings power by examining the household’s current career trajectories. It’s often possible for high-wage earners to play catch-up, building investment wealth quickly in these circumstances, but it’s still likely to require sacrifices. Sad to say, income often stays the same during middle age. Dead-end jobs and stalled careers keep some lucky families’ finances afloat but keep them from saving more money.
Whenever possible, retirement accounts should be fully funded through middle age and right up to the end of employment, even when it forces other lifestyle changes. Financial burdens are likely to increase over time due to rising healthcare and child-rearing costs (which may include college tuition). Going into retirement with nothing but government checks can be very scary, especially if one spouse has depended on the other for decades. This is something that should be avoided at all costs.
More people are working past retirement age now than at any time in the past century. However, government rules require that investors start to withdraw funds from retirement accounts (other than Roth IRAs) at age 7012. Along with longer life expectancies, this requirement adds new significance to investment planning in the retirement years. It makes perfect sense for people over the age of 70 to continue their wealth building through work or investment right up to death whenever possible, especially if a spouse will rely on the funds.
How Much Do You Need to Save?
Financial advisors use different metrics to calculate retirement needs. Many suggest clients accumulate enough savings during their working lives to replace 70-85% of their pre-retirement income. Some even recommend 100% or more to generate the capital needed to pursue a hobby or travel. These common ways of doing things might be out of date now that so many baby boomers are still working after age 65 or 66, often taking pay cuts.
Fidelity Investments recommends saving at least 1x your pre-retirement income at the age of 30, 3x at the age of 40, 7x at the age of 55, and 10x at the age of 67. If you think you’ll need $100,000 per year after you retire, you should have $100,000 in savings at age 30, $300,000 at age 40, and so on. These suggestions are based on the idea that clients will start saving 15% of their annual income at age 25 and put more than 50% of that money into stocks.3 Realistically, many young people don’t have that level of disposable income at age 25 due to student loan commitments or internships, which means a higher annual commitment will be required at a later starting date.
Retirement planning may be hard for young people to accomplish, but it’s relatively easy to visualize the post-work years with a self-examination that considers their expected lifestyle and how they might want to spend their life savings. The Employee Benefit Research Institute (EBRI) makes that introspective task easier with its Consumption Activities and Mail Survey (CAMS), outlining how Americans over the age of 70 spend their money and how those allocations change throughout their senior years.
Housing costs exceeded all other categories by a wide margin, holding at 31-36% across all age groups. Not surprisingly, healthcare costs start out relatively small – 7% at age 45 – and more than double to 15.5% at ages 75 and up. Taken together, it’s expected you’ll eventually spend more than 50% of your retirement dollars just staying alive and keeping a roof over your head. 4 Now imagine how difficult it is to meet those simple needs if income is limited to a monthly Social Security check. Unfortunately, millions of Americans now face that life-sobering challenge because they could not set and address their investment goals earlier in life.
According to research firm Aon Hewitt, the gender gap makes it harder for women to achieve retirement goals than men. Its 2016 study found that 83% of U.S. women weren’t saving enough for retirement, compared to 74% of men. They estimate that a woman will need 11.5 times her final income to meet her retirement needs, compared to 10.6 times for a man. Aon Hewitt further projects that women need to work a year longer, to age 69, to make up the shortfall. The retirement gap is bigger for women because they live longer and need to save for more years.5
These numbers are especially troubling because, as the study notes, men and women participate in 401(k) plans at the same 79% rate, but women set aside an average of 7.5% of their salary while men allocate an average of 8.7%, a deficit made worse by women’s lower average earning power. In 2015, 401(k) balances for women were just 59% of the men’s total – $71,060 versus $119,150. 5 While the authors suggest plan changes to encourage higher saving rates, this disparity is likely to continue as long as the workplace gender pay gap remains.
How to Overcome Investment Obstacles
A 2015 study on goal setting by Dr. Gail Matthews, a researcher at the Dominican University of California in San Rafael, concluded that participants aged 23 to 72 who put their goals in writing and sent regular progress reports to friends had a “much higher success rate than those who kept their goals to themselves.” In fact, more than 70% of participants who wrote down and shared their goals reported success, compared to 35% of those who kept their goals to themselves, never writing them down. 6
This is a remarkable finding, directly applicable to achieving investment goals and objectives, offering a perfect path for individuals lacking discipline or willpower to overcome those deficits in a life-changing way. Age diversity among participants also tells us it’s never too late to achieve realistic investment goals as long as we’re willing to go the extra mile, writing them in detail and reporting our progress to a helpful third party.
Of course, even disciplined individuals may find it hard to stay on track financially when life throws a hardball in their direction. Job loss, divorce, sickness, discrimination, or other headwinds can set life on an unexpected course that negatively impacts earnings and savings power. Volatility can also take its toll on the financial markets and your savings, as it did in 2007 and 2008 when American investors lost trillions of dollars in their retirement accounts.
Bear markets and crashes may be inevitable over the decades between your first contribution and retirement age, despite statistics that confirm impressive long-term equity returns. Many investors don’t have the stomach for those volatile periods, often ignoring sound advice and dumping long-term positions at bargain-basement prices. It’s easy to tell ourselves we’ll stand firm when the next crisis comes, but you won’t know for sure until it happens.
Couples and Investment Goals
Pooling resources between spouses offers an ideal way to overcome many of the challenges posed by investment goal setting. This approach requires deep trust because a break-up later in life can have devastating consequences. According to Kansas State University researcher Sonya Britt, “Arguments about money (are) by far the top predictor of divorce.”