Sound planning is not an academic exercise; it is a purpose-driven endeavor. Think about any aspect of your own life. Aren’t you likely to be much more inspired to take a certain action if you know the underlying purpose for taking it? The same principal holds true with your finances. If you genuinely understand the specific reasons for saving and investing – and those objectives are very important to you – then you are going to be much more likely to make the necessary efforts and sacrifices today to accomplish those things in the future. It’s a fundamental part of our human nature, and the foundation that a goals-based planning process is built upon.
For most people, investing for the future means very little in and of itself. But when those actions are aligned with specific goals (e.g., retiring at age 65 and spending a month during each of the next five years exploring life in Paris, Venice, Barcelona, Sydney and Hong Kong) they truly come to life. Perhaps just as importantly, goals-based planning allows you to look past the distractions of short-term economic and market worries, and keep your focus squarely on those goals you are hoping to achieve 10, 20 or even 30 years down the road.
How goals-based planning works
A great many wealth management firms claim they are financial planners by defining a few large goals such as saving for retirement or leaving a legacy and recommending investment strategies to help you achieve those objectives. However, goals-based planning digs much deeper – working with you to crystalize precisely what those vague future concepts actually mean to you.
It can be a difficult challenge to work from a blank piece of paper and write those first few sentences of your financial planning story. Questions such as “What are some of the important financial goals you hope to achieve?” or “How do you envision your retirement lifestyle?” might initially be daunting. But by asking more personal questions, carefully listening to you and offering examples of what certain elements of that story might look like, a good planner can help you bring it to life. A goal of retiring at a certain age and traveling the world is merely a starting point. Meaningful planning then probes deeper into where you hope to travel, how many trips you would like to take each year, and who would be traveling with you.
Once you tease out all the more tangible underlying goals, it becomes much easier to then help you prioritize which of them are essential needs, which are important wants, and which are aspirational wishes. The goals-based planning process also looks carefully at the interactions between all the various (and sometimes competing) goals you may have. Much in the same way that a pharmacist needs to understand the interactions that can occur between various medications, you must identify potential interdependencies and/or conflicts.
Deeper knowledge leads to smarter actions
The more you and your advisor both understand about your various goals, the more accurate the analysis of which goals you can reasonably expect to achieve and which will require additional actions on your part to accomplish based on your current saving and spending rates. Depending on each goal’s funding requirements as well as their relative priorities, an array of different planning strategies may be available.
- You might choose to increase your current savings rate;
- You may opt to scale back the scope or magnitude of one or more goals;
- You could change your investment portfolio allocation to reflect a higher rate of return (along with a higher degree of risk) to provide a greater likelihood of success; or
- Perhaps you have other assets that you wish to sell to fund currently unattainable goals.
Too many firms lose sight of the basic objective of the financial planning process — to distill the complex universe of financial choices down to a critical few recommended actions that will most positively impact your financial wellbeing. What could you do? What should you do? And what should you do first? It’s what allows you to appropriately align investment strategies to each goal based on your individual comfort level with risk and return, along with the type of investor you want to be.
What makes any planning experience genuinely valuable is when you walk away with greater awareness about yourself and the things that are important to you than when you started. The goals-based planning process does precisely that: bringing clarity, purpose and meaning to your financial future.