Setting and Achieving Financial Goals

Making progress with your wealth requires setting and achieving financial goals. Each new year feels like a fresh start. I don’t know why, since time is continuous, but flipping over the calendar always feels like it’s time for something new.

We all set goals, like join a gym, eat healthy, or save more money. Yet, maybe a month or two later, the goals are forgotten, and we’re right back where we started.

One thing we miss in the goal-setting process is setting specific goals. “Save more money” is a great goal, but how? How much? When? Why?
This year we’re going to do better by setting S.M.A.R.T. goals.

S.M.A.R.T. stands for Specific, Measurable, Achievable, Relevant, and Time-based.

Using this framework increases our odds of success, because when we get clear on the details, we can program them into our lives.

I can see resolutioners already falling behind in my neighborhood. One of my daily goals is to walk my dog, Shaggy, at least one mile every day. For a few weeks, I saw people walking the neighborhood that I had never seen before. Then it got cold. Really cold. I haven’t seen them since. Maybe they’ll be back, but I won’t hold my breath.

The thing is once you find out how easy it is to stop, you stop.

When it comes to many things, willpower isn’t enough. You need a system to hold you accountable. The good news is that when setting financial goals, we can automate, and take ourselves out of the process.

Each year I review my financial plan, review my progress, and recalibrate my goals as needed. When setting financial goals, I really only want to worry about what I can control. A gyrating market is outside my control. I can control, however, how I invest, and how much I save.

For example, my financial plan supports this goal: Have the option to retire at age 65, with 100% income replacement.

Let’s break this retirement goal into its S.M.A.R.T. components.

Specific in this case means how much. This will give us a benchmark to mark progress.

Let’s assume lifestyle costs are $100,000 in today’s dollars, and grow over time, such that in 20 years, at age 65, annual retirement lifestyle costs will be $150,000. And we want to make sure our portfolio supports that expense, and never runs out.

A quick estimate, assuming a 4% withdrawal rate, means we need a $2,500,000 portfolio to support $100,000 of annual income today.

Measuring is fairly straightforward. Each year, you can plot the value of your accounts and compare it to where you need it to be. I like a chart like this:

It shows you where you started, and a projection (smoothed) of where you’re headed. With 20 years to go, being approximately right and staying on track is good enough, since so much can change in those 20 years.

Setting goals, even stretch goals, is excellent. But keep them in context. You want to set goals that you have a good chance of actually meeting. At age 45, with no current savings, it may be extremely difficult to build a large retirement portfolio without herculean efforts.

However, if you’re starting to plan for retirement at age 45 with $625,000 in current retirement savings, then your annual savings targets become more reasonable.

That’s why figuring out where you are in relation to your goals is critical. It helps us know what is or is not achievable. Putting and keeping the possibility in perspective is key.

This is your why, the reason you’re doing all this planning.

My why for retirement is financial independence, and knowing that my family is protected from loss of income or catastrophe. I want to be in a position where, if push comes to shove, I don’t have to do anything that I don’t want to do for money.

Our retirement goal is specific. It tells us how much. The other key component is when. Using the time value of money helps us get even more specific.

We all have an age in mind when it comes to retirement. And if it’s not retirement, then it’s financial independence. For our example, our when is age 65, 20 years from now.

In 20 years, we want to hit our retirement goal. The second part of when in retirement planning, is how long it will last. I’m assuming 40 years. This is meant to be conservative, since we’re all living longer. However, we need to balance not enjoying our savings and not running out of money.

Since our retirement portfolio will be invested, we’ll be earning a return throughout retirement. If we invest for a 7.0% target rate of return on our savings AND our retirement portfolio, then we can calculate a portfolio need of $2,500,000 at age 65.

Great news! We’ve now figured out a S.M.A.R.T. goal for retirement. And as great as the plan may be, it won’t matter if we don’t take action and then stick to the plan.

So, here’s where we are:

1. At age 65, we need a $2,500,000 retirement portfolio
2. With a current portfolio of $625,000, we need to save $15,000 per year
3. Invest in a portfolio that returns 7.0% per year on average.

Sticking to this goal can be hard. It’s asking for more than $1,000 per month in savings. You can do it, though. Psychologists tell us out of sight out of mind. To create your retirement portfolio, here is our action plan in 2022:

1. Increase 401k auto deduction to 10%.
2. Link your bank to your Roth IRA, and deposit $500 automatically the 1st of the month.

This action plan takes you out of the equation. It helps ensure that you pay yourself first by eliminating the need to manually conduct the transaction each month. By making your deposits automatic, you take individual evaluation, and really, self-sabotage, out of the equation, leaving continuous participation in your plan in its place.

If you’d like to discuss your financial goals, and how to implement a S.M.A.R.T. plan to achieve them, schedule a free consultation with one of our fiduciary advisers.