Financial planning, in many ways, is about achieving balance. Balance between saving and spending, between work benefits and private products, between taxable accounts and tax deferred accounts.
Perhaps the hardest balance to achieve is between enjoying life now while also saving for retirement in the future. With people living longer and wanting to retire earlier, many people have to fund 30+ years of retirement with 30 years or less of savings.
Rule of thumb tends to be you should save at least 10% of your household income in some form of retirement account as soon as you get that first paycheck. But, is that enough?
On the flip side, if you need to be saving 20% to afford living in the future, how difficult does that make living right now? Plus, retirement might be far off and there’s better things to spend money on in the here and now. Truth is, most people opt for instant gratification with their hard-earned dollars over delaying gratification for some general rule that says it’s a good idea.
Enter goals-based financial planning and, yes, that’s what we do. Do you want to go on an annual vacation? Contribute to your favorite charity every other year? Downsize your house and simplify? Remodel the entire basement?
Using detailed goals specific to your wants, needs, and wishes helps us as financial planners determine exactly how much you need to save. Being able to visualize exactly how you want to live in retirement provides more motivation to save towards your goals than any rule of thumb ever could.
Thus, by answering simple questions and listing future goals that you are excited for, it’s possible to find a balance between saving for retirement and spending now.
Source: Zepp, Phillip P., and Stuart J. Heckman. 2018. “Clients’ Perceptions of Their Financial Futures Predict Choices.” Journal of Financial Planning 31 (5): 38-47.