“A goal properly set is halfway reached.” – Zig Ziglar. We all have retirement goals, but unfortunately, we tend to be very vague and noncommittal about them.
Most investors will tell their financial adviser that they’d like to “retire comfortably” or “maintain their current lifestyle,” but what does that really mean? Many advisers tend to avoid the issue of goal setting, as it places greater emphasis on measurable milestones and thereby accountability to their clients. Investors, too, tend to undermine this process, as they also have a habit of being inexplicit to minimize future feelings of guilt for not reaching their goals.
Whether you are already retired, nearing retirement or in your prime earning years, setting specific and quantifiable investment goals is paramount to reaching them and critical to investment success (in the next column I will discuss why “beating the market” is a silly and meaningless goal).
Step One: Ask Yourself This Important Question
Start with asking a very simple question with a very complex answer: “What do I want?” Then write down the responses (if you have a spouse or significant other, they should go through the same exercise and then you can compare notes).
Once you’ve identified these specific goals, determine what you expect these goals to cost. For example, if your goal is to travel three times per year to different continents and pay off your home within five years, determine how much that will cost. Don’t forget to account for inflation. A ballpark of 3% annually is a good starting point.
Step Two: Consider Costs
Next list your lifestyle choices and their costs, i.e., what does day-to-day living cost. Estimate how much cash flow your portfolio (excluding other income) will need to generate to support this.
By now, you’ve probably surmised that your dreams and aspirations are very expensive and that your portfolio would have to generate monstrous returns for you to be able to achieve your goals, and that’s OK.
Step Three: Prioritize
Now comes the hard work! It’s time to prioritize goals and have contingency plans in the event certain returns are not achieved in a given period of time.
For instance, let’s assume you have $2 million in IRA, 401(k) and other investments, your $750,000 home is paid off and you are receiving $2,000 per month in Social Security. You have estimated that your day-to-day expenses at $10,000 per month. This means that your portfolio will need to generate $8,000 per month ($96,000 per year) in cash flow for you to meet these expenses. This amounts to a near 5% withdrawal rate, which by most standards is viewed as unsustainable over long periods of time without depleting principal.
Remember, if you are 65 there is a better than 50% chance that either you or your spouse will live into your 90s, and that means that inflation and unexpected costs will have an increasing impact, and you have yet to travel the world or do any of the other things on your goals list.
Prioritize and be innovative – what if in 10 years you take out a reverse mortgage on your paid-for home? That $250,000 cash infusion changes the math to a withdrawal rate of just over 4%. In simple terms, have aspirations and dreams, prioritize them and then match up their costs to your assets.
It’s a lot of work, but you’ll be able to sleep soundly knowing you have a well thought out plan and have accounted for predictable variables.
The Rest of the Series
This column is the first in a six-part series on investor education.
- Column 1: Understanding your goals
- Column 2: Why benchmarking to the S&P 500 is not a good strategy
- Column 3: It’s about cash-flow, not returns
- Column 4: How much are you paying for your portfolio?
- Column 5: 5 critical questions to ask your financial advisor
- Column 6: ‘Senior Inflation,’ the not so silent retirement killer
Oliver Pursche (opens in new tab) is the Chief Market Strategist for Bruderman Asset Management (opens in new tab), an SEC-registered investment advisory firm with over $1 billion in assets under management and an additional $400 million under advisement through its affiliated broker dealer, Bruderman Brothers, LLC. Pursche is a recognized authority on global affairs and investment policy, as well as a regular contributor on CNBC, Bloomberg and Fox Business. Additionally, he is a monthly contributing columnist for Forbes and Kiplinger.com, a member of the Harvard Business Review Advisory Council and a monthly participant of the NY Federal Reserve Bank Business Leaders Survey, and the author of "Immigrants: The Economic Force at our Door."
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