College expenses. Retirement. Estate planning. Your list of long-term financial goals get very large, very quickly. You may be tempted to throw your hands in the air and say that it’s all too much, too overwhelming. That can lead to poor planning and suboptimal decisions. A better course of action is to prioritize and then set a methodical, realistic, achievable plan around those priorities.
Retirement, Retirement, Retirement
The first three priorities of real estate decisions are “location, location and location.” In the same way, your top long-term priority should be “retirement, retirement, retirement.” Make sure you have enough to live out the rest of your life in the style you expect. In a practical sense this means starting early, making full use of every advantage (e.g. the annual contribution maximums in your 401(k) and/or IRA plans), and allocating your assets to align with your specific goals, risk tolerance and time horizon. These considerations should dominate your long term financial planning, and once this process is in place you can turn the focus to other priorities.
One of the most common financial mistakes people make when determining how to allocate the money they do have is to separate their daily spending decisions from long term savings and investment goals. The mistake comes about naturally – it’s how our brains tend to work – but honest mistakes can be overcome with discipline and effort.
Keep in mind that the value of your money compounds over time. The longer the compounding takes place, the faster its rate of acceleration. Every time you decide to forego some big-ticket item like a top-of-the-line Viking grill and put that money to work for your future, the more you will benefit from the law of compound interest, and the closer you will be to realizing those future goals.
Allocation, Allocation, Allocation
The next priority you need to determine is the following: would you rather have an adventurous portfolio that you can brag about at cocktail parties, or would you rather enjoy a secure retirement? That’s a rhetorical question; I hope your choice is the latter.
Asset allocation is the most important decision you can make that determines the health of your long-term portfolio performance. You may hear chatter in the financial news about exciting tactics like stock picking and market timing, but these are less relevant. A story about some market maven who “called” the top of the market may make for interesting press, but it has almost no relevance to how you will build value for your assets over time.
What types of assets should you prioritize within your asset allocation?
Favor growth-oriented assets like equities and commodities when you’re a long way from retirement, and gradually shift towards income assets (like high dividend-and interest-bearing securities) as you get closer to your goal. Set a target that aligns with your specific situation, and bear in mind that your goals are likely to be different from those of others in your age and demographic brackets. Rebalance the target at least once a year, and make the growth-to-income shift gradually as you transition through life.
Approaching your long-term financial goals with clear priorities will help you create a plan for a great retirement.
What are your long-term goals? Tell us what you think.
For advice and tools to help you see your goals through to successful outcomes, visit Jemstep.com.