Cheeseburgers, fries and finances

It’s the New Year, and that means it’s resolution season. For example, like many other people, I’d like to lose the 20 pounds or so that I’ve put on over the last 10 years. Is this a goal? A wish? Of course it’s attainable, but the real question is, am I willing to do what it takes to achieve this? Like a lot of resolutions, those pertaining to financial goals are often put into black and white terms….I need to get my mortgage paid in 5 years ….I need to retire at 55 ….I need a new job to earn more money so I can save more ….

Of course, having goals like this is a positive step from having no goals at all. Many people are so overwhelmed by the reality of their current situations that they feel frozen without the ability to even set goals. For those people, while the best approach is to just take some small steps in a positive direction, sometimes their approach is to just send it and book the $15,000 family vacation on the credit card. We’ve seen it oiften.

But there is also a consistent problem with the goals as I list them above, even though most are specific and measurable. The problem with these goals is that there needs to be a “why” behind them, and this is where we can help clients.

Why do you want to get the mortgage paid off in 5 years? Maybe it’s because you want to move, or because you have other things you want to do with that cash flow. But more likely, it’s because you want control, you want peace-of mind, security, etc. Or because someone told you that you should, or you read it somewhere. Let’s get to THOSE things you are trying to achieve first, because paying your mortgage off MIGHT be the way, or it might not. For instance, if you can earn 5% on your cash while you keep your 3.25% mortgage you took out 4 years ago, that COULD be the better move and actually give you more security and flexibility.

Why do you want to retire at 55? Because you hate your job? Physically can’t do it any more? Have you had parents or friends die young and not be able to do what they wanted? Do you actually want to retire, or do you want to do something different? It’s these things that need answering because this decision for most everyone involves tradeoffs (more on that below).

Why do you feel you need to earn more to save more? A lot of times people will say this because they have a preconceived notion of what they should have saved. Countless times we have received some version of the question “How much do I need to have?” or “I read in whatever publication that I will need $2 million to retire” or “How much do most of your clients have saved for retirement?” The reality is that this is a very individual answer, with the primary variables being how much do you plan to spend, how much social security or pension income will you have and how long do you think you will live? If we fix variables from those assumptions, we can calculate the income you will need from investments and estimate a lump sum you would need at retirement to provide that. I’ll tell you this – we’ve had clients with $200,000 at retirement and be just fine, and clients with $2 million and have it not be enough.

When goals are set, when working with clients it’s important to consider WHY something is a goal vs. just the goal itself. Most often, goals involve tradeoffs. If a client wants to retire at 55, they may have to accept living a more modest lifestyle or to get a part time job or transition to a less strenuous career vs. retire. On the other hand, if a client wants to live a certain lifestyle, and build in an extra $15K annually for travel in the first 15 years of retirement, they may have to work 2-3 more years to buy them that flexibility. Which is right? Only you know, and we can show you the tradeoffs for each.

Finally, goals are not static – they change or adjust over time. For example, it is very common as a client approaches the retirement date, we have set that they have second thoughts and consider delaying. This is most often not at all a financial decision, it is an emotional one that has to do with loss of identity, routine, friendships and an unclear vision for what’s next. And that’s OK, these reasons are valid. I believe financial planning is often much more behavioral and emotional than it is about the numbers, and that surprises a lot of people. Obviously changes in marital status, children, loss of parents, job changes, moves and countless other things will mean adjusting prior plans as well, so while it’s important to have plan it’s important to build in flexibility.

Your goals are not for us to judge – just to learn about so we can help you make decisions that are aligned with them, and to outline your choices and potential consequences of those choices.

Now….about those 20 pounds, cheeseburgers and fries and my own set of trade-offs…..