Just as we do for other aspects of our lives, it’s critical that we put some time aside—for us and our loved ones—to ensure we have a plan in place that can help meet our financial goals and dreams.
A 2004 University of Michigan Health and Retirement Study of Americans over 50 showed that those who created financial plans and stuck with them achieved an average total net worth three times higher than those who didn’t.
Of course merely having a financial plan doesn’t cut it. It needs to be complete, realistic and actionable. At Schwab, we believe there are five key factors to consider as you develop a plan to manage your wealth:
- Create a list of goals that that include how much you’ll need and a deadline. If you write down your goals, you’re more likely to achieve them. Think of them as a road map to where you want to go, and make them practical and attainable. Here’s a simple two-step approach:
Step 1: Divide your goals into three categories: short term (less than one year); medium term (one to five years) and long term (more than five years).
Step 2: Attach a dollar amount to each goal. For instance, a short-term goal might be a family vacation. How much will it cost? The more specific you can be, the more motivated you’ll be to work toward that goal.
- Review your current situation. Total up how much money you have already accumulated toward each of your goals, and how is it being invested. Be sure that your allocation between stocks, bonds and cash investments is appropriate to help reach your short-term and long-term financial goals. Also consider your investment vehicles. Make use of tax-advantaged accounts for retirement savings. But avoid tapping those for non-retirement purposes, like the down payment on a home. Instead, use taxable accounts for these types of major purchase goals.
- Make assumptions about your future. For longer-term goals like retirement, consider how much you’ll be contributing towards each of your goals over time. The earlier you start saving, the less you’ll have to set aside each year. If you start saving in your 20s, 10% of your salary before taxes each year is a good goal. If you wait until your 30s, that number needs to bump up to 15%. Wait until your 40s, and you’ll have to put away 30-35% each year. No matter when you begin, the important thing is to stay on course.
- Assess your risk tolerance. Evaluate the amount of risk you’re willing to stomach with your investments to help inform how you should allocate your portfolio between stocks, bond and cash investments. This is key to staying the course toward your goals during the inevitable ups and down in the market. Your willingness to take on risk will and should vary depending on your various savings goals. For example, if you’re getting ready to send your child off to college, you probably don’t want to risk significant losses in your portfolio. Rather, you might be aiming to grow the value of your investments but also have current income needs and want relative stability. Just as an example, for those types of needs, Schwab’s moderately conservative model portfolio has 40 percent allocated to equities, 50 percent in fixed income and 10 percent in cash or cash investments. A more long-term goal may allow you to be a bit more aggressive in your allocation , but always stay diversified.
I recently met with a client who is an executive at a local company. She came in to meet with me because she suddenly realized that at the same time she wishes to retire, her daughter will be enrolling into college. Though she initially felt a little daunted by the idea of funding her retirement and paying for her daughter’s college education simultaneously, we worked together to map out a plan to help her meet both of her financial goals
- Analyze return expectations. Based on your risk tolerance, a sound investment plan contains some sort of expectation regarding the portfolio returns. These return expectations aren’t year-by-year forecasts, but represent long-term averages used in the planning process. It’s important to stay realistic. If your return estimates are too optimistic, you run the risk of not being able to retire on time or pay for your child’s education. If they’re too pessimistic, you may needlessly sacrifice some of your current lifestyle. To reap the most reward from your investments, try to avoid unnecessary fees and taxes.
Jennifer Furste Robinson, Certified Wealth Strategist, is a Managing Director at Charles Schwab with over 23 years of experience of leading financial professionals in helping their clients achieve their financial goals. She is a recipient of the 2015 Professional Businesswomen of California Industry Leader Award, currently serves as an executive board member of Arizona Women’s Leadership and is a volunteer 
Investing involves risk including the potential loss of principal.
Diversification, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Information presented is for general informational purposes only and is not intended as personalized investment advice as individual situations vary. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified professional.
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