Figure Out Your Investment Goals

By ALAN FARLEY Updated Mar 14, 2018

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 spread into three branches, depending on age, income and outlook. Age can be further sub-divided 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 old 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. It’s common to experience setbacks during this period, getting stuck in overpriced home rental and car payments or forgetting that mom and dad are no longer picking up the monthly credit card bill.

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 earnings 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 elderly parents. Those unexpected challenges demand a dose of realism when choosing 401(k) allocations or deciding how to spend a year-end bonus, with the old axiom “saving for a rainy day” ignored by many folks until it’s too late.

Fortunately, it’s never too late to become an investor. You may be in your 40s before realizing that life is moving more quickly than expected, requiring contemplation about old age and retirement. 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.

Set Up an Investment Goals Workflow

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 progress on a periodic basis, invoking discipline when needed to stay on track. Third, they generate motivation that impacts our non-financial selves in positive ways that can improve health and mental outlook.

Once established, the investment plan forces you to think about sacrifices that need to be made and budgets that need to be balanced, understanding that delay or failure will have a direct and immediate impact on your wealth and lifestyle. This process induces long-range thinking and planning, allowing you to abandon a hand-to-mouth approach and set a priority list for the things in life you truly value.

Use monthly or quarterly statements to review progress and recommit to your chosen life plan, making small adjustments rather than big changes when money flow improves or deteriorates. Review your annual returns periodically, and enjoy seeing your wealth grow without direct intervention or a holiday check from grandma. Learn to deal with losing periods in a mature manner, using the red ink to build patience while reexamining how your decision-making may have impacted those negative returns.

The Australian Investors Association recommends using the SMART format when setting investment goals. Here are the elements:

  • Specific – make each goal clear and specific
  • Measurable – frame each goal so that you know when you have achieved it
  • Achievable – you need to take practical action to achieve a goal
  • Relevant – determine whether your goals relate to your life and are 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 or poorly 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. Of course, 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 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 with the enormous burden of student loans incurred by people born after 1990.

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 senior 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, SEP and other retirement accounts unless dire circumstances offer no viable alternatives.

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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, 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 engaged. 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. Sadly, income often stagnates through middle age, with dead end jobs and stymied careers keeping family finances above water but preventing the building of more substantial savings.

It’s critical that retirement accounts 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). Entering retirement with little more than government checks in hand can produce well-founded anxiety, especially when one spouse has been dependent on the other for decades, and should be avoided at all costs.

More folks 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 70½. Along with longer life expectancies, this requirement adds new significance to investment planning in the retirement years. It makes perfect sense for senior citizens to continue their wealth building through work or investment right up to death whenever possible, especially if a spouse will rely on the funds as a widow or widower.

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 pre-retirement income. Some even recommend 100% or more to generate the capital needed to pursue a hobby or travel. These common approaches may be outdated, given the explosion of baby boomers remaining in the work force after age 65 or 66, often taking pay cuts rather than sitting at home in their rocking chairs.

Fidelity Investments recommends saving at least 1x your pre-retirement income at age 30, 3x at 40, 7x at 55 and 10x at 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 recommendations assume that clients will save 15% of their annual income every year starting at age 25, with more than 50% of those savings allocated to equities. 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 focus on, 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 older Americans spend their money and how those allocations change through the senior years.

Housing costs exceeded all other categories by a wide margin, holding firmly above 40% between ages 50 and 85. Not surprisingly, healthcare costs start out relatively small – 8% at age 50 – and more than double to 19% at age 85. Taken together, it’s expected you’ll eventually spend more than 60% of your retirement dollars just staying alive and keeping a roof over your head. 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 failed to set and address their investment goals earlier in life.

The gender gap makes it harder for women to achieve retirement goals than men, according to research firm Aon Hewitt. 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. Women’s longer life spans intensify this retirement gap, with their savings needed for more years.

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 7.5% of their salary while men allocate an average 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. While the authors suggest plan changes to encourage higher saving rates, this disparity is likely to continue as long as the workplace gender gap in pay remains.

How to Overcome Investment Obstacles

We live in an entitlement culture, expecting immediate gratification for the things we crave, whether it’s the latest tech gadget, sushi plate or trip to Vegas. However, every time we pay for something we have less money to spend on other things, including our investment objectives. Sadly, many folks lack the discipline or willpower to forego immediate pleasures for future prosperity, generating a feedback loop with great destructive power over time.

A 2015 study on goal setting by Dr. Gail Matthews, a researcher at 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.

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 financial track when life throws a hardball in their direction. Job loss, divorce, sickness 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 they did in2007 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 long, but you won’t know for sure until it happens.

Couples and Investment Goals

Pooling resources between husband and wife, a committed couple or same sex partners 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. For example, a 2004 study found an estimated 14% of couples choose to keep their finances separate. It’s important that both partners fully agree at the outset with how pooled resources will be managed to lower the odds of a misunderstanding. The study also found that 70% of couples talk about money on a weekly basis, which is good and bad, because many of those discussions turn into heated arguments, according to a work published in 2012 by the National Council on Family Relations. Reviewing those results, Kansas State University researcher Sonya Britt concluded, “Arguments about money (are) by far the top predictor of divorce.” She also notes arguments about money may stem from a couple’s “deeply-held beliefs” taking us back to the hardwired but often unconscious bias generated through early life experiences.

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Two incomes make saving for a home and qualifying for a mortgage much easier goals to accomplish. Cooperation between partners is vital when engaged in this intermediate term planning because goals need agreement and coordination to avoid major complications. One spouse tapping credit card limits while the other diligently allocates weekly income into savings can generate a major roadblock to long-term prosperity.

Partnership can also ease the housing burden for those ages 50 to 85, when more than 40% of retirement income is allocated to rent, mortgage payments, insurance, property taxes and maintenance. The savings from pooled income can be significant in multi-person households, freeing up capital for other outlays. Conversely, physical disparities between spouses or partners may complicate healthcare expenses, with a major illness or institutional care overcoming Medicare coverage, creating hardship for the other partner.

The Bottom Line

Figure out your investment goals as early in life as possible because waiting too long introduces complications that may be difficult or impossible to overcome. Planning and execution requires a level of discipline and commitment that makes many folks uncomfortable, often requiring major life changes to be successful. Start small if the process feels overwhelming, with minimum 401(k) contributions that let you watch a small nest egg grow quickly.

Raise the contribution to the maximum as soon as possible and take the next step, developing realistic short- and intermediate-term investment goals for the disposable income accumulating in a checking or savings account. Remember this is a lifetime pursuit that demands careful planning at each stage, but the payoff is enormous, offering the most reliable path to prosperity and abundance.