Many people save for their future because we are told we have to. You may have enrolled in your 401(k) at work because the adviser who spoke during the enrollment meeting warned that you cannot retire on Social Security alone. Perhaps you understand the employer match is free money your company is giving you just for participating in their 401(k). Either way, you are saving for your future.
Financial plans happen because you need direction. You want to retire, but you also want to save for your children’s education or protect your personal assets from your business assets. Competing goals require a plan.
But here is where we need to think differently: Your plan needs to provide you with a maximum spending amount. Does your financial plan tell you today what you can spend and still achieve your financial goals with reasonable certainty? The answers to the questions “Can I retire?” and “When can I retire?” have two very different answers.
“When can I retire?” is a mathematical formula. You can go to a financial planner who can help you estimate how much money you need based on your anticipated spending needs per year in retirement. You can retire when the formula shows your assets will last through your anticipated lifetime.
“Can I retire?” is, in my opinion, the better question, because it requires you to define your future. You may be able to afford to retire, but do you want to? Maybe you want to continue overseeing the company you’ve built over the last 25 years. Perhaps you want to leave a legacy through the charity you’ve sponsored for years. Do you want to be the picturesque couple strolling on the beach on a tropical island, or do you want to be living in your son’s in-law suite because it is all you can afford?
A true financial plan will answer meaningful questions such as “What can I afford to spend?”, “How much should I allocate to stocks and fixed-income investments?” and “How are my assets protected while still obtaining the growth necessary to last 20 or 30 years?” every year, starting with today. If your plan can only answer these questions based on a specific date in the future, you do not have a complete plan. A complete plan will also define your long-term goals and detail the process you’ll follow today to reach those goals. A complete plan will also be able to accommodate changes in those goals.
You also need to be careful not to confuse your investment products with a plan. Products such as a whole life annuity or a target-date fund tend to only answer one question because they provide a solution to a specific need within an overall plan. Products like these are not bad, but they do not provide an overarching direction today. They don’t answer “What kind of retirement can you really afford?”
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.