A lot of people talk about retirement someday. For me, before I gained any sense of financial freedom, all I knew was that that I want to be out of debt. Once I got there; however, I didn’t really know what was next. I was saving 15% for retirement in my 401k at work and started saving a lot more in my after-tax investment accounts but I didn’t seem to have any sense of direction beyond that. What is next I thought.
I needed to come up with new goals so that once again, I could have something to shoot for. Saving and investing is much more fun and interesting if you have goals and setting some financial goals is what I decided to to.
Here are four ways that I set smarter financial goals:
- Think long term – I’m 52 years old and know that at some point, I may want to slow down and let my investments carry my financial obligations. How much will I need? I need to figure that out. Here’s how I figured that number out. I have been doing monthly budgets for many years, so I have a good idea in today’s dollars how much I need to live on. Assuming I’m debt free, and a fully paid off house, my number is around $45,000 annually. Using historical estimates on my investment’s returns, it isn’t hard to back into the magic retirement number (not including Social Security which may not exist when I’m ready for it). Let’s say my investments averaged 8% annually. Simply take $45,000 and divide it by 8% (45,000 / 0.08 = $562,500).
Assuming your money is saved in a Roth IRA or Roth 401k, that’s not a bad estimate. That means you paid taxes on the money before it went into your investment account. If you’ve saved for retirement in a pre-tax vehicle, such as an IRA or regular 401k, you’ll need to take taxes into account. Using 2020 IRA tax brackets, the tax rate at $45,000 annually is 22% so the magic number calculation is slightly different. Take $45,000 and add 22% to it as the annual income need (45,000 + (45,000 * 0.22) = $54,900). Then do the same calculation as described in the first example (54,900 / 0.08 = $686,250)
- Think short term – I recommend doing what I do. I set a monthly budget so you can tell your money where it is going to go before it has even been earned. A successful monthly budget includes starting with your income and assigning every dollar to expenses, saving and debt reduction. This all happens before the money comes in. Every dollar should be accounted for. You are the Chief Financial Officer of your household so like any good CFO, you want your household to be successful. Work with your spouse if you’re married and agree on where the money will be spent in advance. This helps eliminate money fights and disagreements down the road.
- Help others – Something I tend to forget on a regular basis is that this life is not all about me. Maybe you’ve run into this too. One way to really gain happiness is being thankful for what you have and give to others. For me, I like to give to my church and I’m sponsoring two kids from India so they can go to school, get a good meal and have good clothing to wear. I recommend making giving the first thing you do with your money and setting a goal to allocate a percentage of everything you make to giving. For me, my goal is 10% or more. It sounds like a lot, I know but, in my experience, the more I give, the more I tend to make. (Sounds strange but it works) And it really takes the focus off me and puts the focus on others.
- Legacy: Finally, think about what happens to those you leave behind when your time comes. One of the most important things you can do for your family when you’re gone is making sure they aren’t going to struggle financially without you. They are already going to miss you emotionally and combining that with financial struggles isn’t a good idea. A great way to take care of them is to take out term life insurance in the amount of 10 to 12 times your income. Term life insurance in that amount equates to income replacement for your family. For example, if you make $70,000 per year, you would want to have somewhere between $700,000 to $850,000 in coverage.
So put these four ways to set smarter financial goals to good use. As the CFO of your household, it is up to you! And if you ever need some additional help, seek out the help of a financial advisor.
Need help? Schedule a consultation with Ken.
