Setting Your Long-Term Financial Goals

Okay. The underpinnings are in place. Now it's time to pour the concrete.

With a renewed commitment to a personal budget, a handle on your net worth, and a new attitude on handling your personal financial records, it's time to get serious about where you want to be financially and how you plan to get there.

Whether it's a one-year plan to pay for your daughter's wedding, a five-year plan to purchase your first investment property, a ten-year plan to pay for your son's college education, or a 30-year plan to save for retirement, establishing finite financial goals down the road is a winning plan.

Achieve most of your goals - or come close - and you have measurable proof that you are headed in the right direction. Fall short, and it's a head slap that more drastic steps may be necessary.

Unfortunately, we're seeing more of the latter these days. A recent survey by a Big Six accounting firm shows that unless we save a great deal more than we currently do, three out of four Americans over the age of 20 will have less than half the money they need to retire and maintain their pre-retirement standard of living.

In fact, on average they would have to reduce their expenses by 60% -- or get a job flipping burgers -- in order to make it through their twilight years without running out of money.

If your after-tax expenses currently run $50,000 a year and you retire today, you would have to cut your spending by at least $30,000 if you want your money to last as long as you do. And that huge cut in your budget assumes that you have the good sense to die on the day you spend your last penny. If you survive longer than the actuaries estimate, you'll outlive your money.

That's why setting long-term financial goals is so critical. Fortunately, it's also pretty easy.

Here are some ideas that will help you establish your game plan:

Be specific -- Aim for clear targets such as "$2,000 into a retirement account," rather than generalities like "contribute to savings."
Put pay raises directly into savings or toward debt reduction -- If you make ends meet now, then you don't need to live off the cash you get in a pay raise. That being the case, put the extra money where it will do the most good, either increasing retirement savings or trimming debt. In this way, you maximize the good of the pay raise and move toward long-term goals without reducing your standard of living.
Invest in stocks -- It is virtually impossible to beat inflation and generate a decent return without investing in the stock market. You're taking on investment risk, but you are avoiding inflation risk, and if you have a diversified portfolio, you are spreading your investment risk. Inflation risk isn't to be understated, even though it's been relatively non-existent for the past several years. Let's say you're heavily invested in Treasuries that pay 6% interest. Inflation suddenly spikes upward to 10%. You're now losing money and the only way to compensate is to sell those investments at a loss and reinvest the money or to continue falling further behind in real income because inflation is outstripping the return on your investments.
Estimate how much you'll need to retire in comfort -- Start with a rough estimate based on what you earn now. If you expect a more modest life in retirement, use 60% to 70% of your current income. However, if the future holds too many unknowns, start with 100%. Then tackle more detailed financial calculations-either on your own or with the help of financial planners-to assess such factors as the likely impact inflation will have on your purchasing power.
Develop a savings plan -- How far away you are from retirement plays a large part in how you should invest your retirement money. Historically, there are three stages to a long - term regular savings plan for retirement: capitalization, consolidation and conservation. In the first stage, people should be most concerned with building up their retirement savings portfolio. These investors can take as aggressive an outlook as their nerves can stand because at this point there is little capital to risk. The second step, consolidation, makes up the bulk of your savings plan; balance the aggressive investments with some tamer ones, to better protect your existing assets. The final change, from consolidation to conservation, when your investments should aim to preserve the capital you have, should take place one to three years before you retire. The exact timing of all these should take current market conditions into account.
Start saving now -- You'll need to save enough from your 30-odd years of working to live for about 20 years in retirement. So get cracking. When you do ramp up your savings program, overestimate your needs. It's far better to end up with too much money than not enough. Even a little bit more a year can make a difference in the long term.
Get some good life insurance - Solid life insurance is critical to your family's fiscal fitness. If you're out of commission, or worse, chances are you may not have enough life insurance to protect your loved ones. Usually, several hundred thousand dollars worth of term life is the way to go. Term is generally the most inexpensive way to insure a life. The policies offer no savings feature, no cash value, and no retirement benefits. If the policyholder dies during the coverage period, the company pays a specified sum of money to the beneficiary. The key for deciding how much insurance to purchase is for each partner to determine how much money he or she would need to live comfortably.

How Much Should I Save for Retirement?