Understanding how much your future life is going to cost is the first step in developing a plan to pay for it.
In a recent conversation with my aunt, it came up that one of her clients had told her “the” amount of money everyone needs to have saved for retirement. My aunt was very concerned because that probably wasn’t the amount she was going to have available for her retirement. I assured her that the reality is the “number,“ the amount needed to fund the goal (i.e. retirement, kids education, etc.) is different for everyone. What is the same is that everyone needs to know their number.
Between the recent devastation of wealth in the stock market and in real estate values, many people have been very concerned about their ability to accomplish their financial goals. While the fear that we might not be able to achieve our goals is not pleasant for anyone, and it is perfectly normal to not be happy about bad news, the reality is, it is what it is. We cannot change the past. Time marches on, and doing nothing is not going to change the fact that we have been through a historically tough period for investment portfolios. That is why it is critical that people take action now to figure out the extent of the damage. Only by having a clear understanding of where you are now in relation to where you want to be, can you begin to take the steps necessary to get you back on track.
The first step in assessing the situation is figuring out your goals. A lot has changed in the last year, and the reality is your goals may need changing also. When you were realizing double digit appreciation on your real estate and stock portfolios, your ideal goals seemed pretty achievable. Your new reality may be something less than ideal, but many people may be surprised to find out that an acceptable goal is still well within reach. By systematically reviewing and prioritizing what is important to you, you will be able to come up with an updated set of goals. The amount you need to pay for those goals is your number.
Once you’ve been able to re-evaluate your goals, it’s time to figure out where you are now. Where are you spending your money, and how much do you still have saved for your goals. Often times, people don’t realize exactly where they are spending their money. Many people will find that their priorities have changed, and the things they used to spend their money on are no longer a priority. Reducing expenditures in those areas will free up money to fund the new priorities.
Once you are able to stop spending money on things that aren’t as important to you, you will be able to save for the things that are. How are you going to invest those savings and grow them to arrive at your number? After the big losses we’ve just seen in the stock market, many people are hesitant to take on any risk. The problem is that many people need to achieve higher rates of return than are available in “safe” investments like bonds and CD’s. Additionally, those “safe” investments don’t historically do well in inflationary environments, and inflation is usually what you get when the government starts increasing the money supply, like they’ve been doing lately. So what’s the right mix of growth and “safe” assets? Many people have neither the time or interest to try and figure that out, and will delegate that responsibility to a professional. In any event, you will need to figure out an investment mix that provides the return you need with the risk exposure that allows you to sleep at night.
Once you’ve figured out how much to save, and how to invest your savings, it’s time to monitor your progress. The one thing I know for sure about the future is nobody knows for sure what’s going to happen. Your goals and priorities will evolve and change, markets will go up and down, and who knows what else. No matter what happens though, you need to know your number so you can take the actions necessary to keep you on track to meeting your goal.
