We all have dreams regarding important milestones we hope to achieve during our lives – from buying a home and funding college for our children to saving enough for a comfortable retirement. But in order to successfully achieve these goals, we first need to do a better job of defining and quantifying them.

Generally speaking, we’re much more likely to take specific actions when we have clear motivations for taking them. Instead of a vague idea of a “comfortable” retirement, meaningful goals-based planning requires significantly more detail. While one person’s idea of comfortable might revolve around being able to cover their essential expenses (e.g., food, shelter, clothing) with enough left over for occasional travel, someone else’s “comfortable” might entail traveling the world, purchasing a vacation property, and getting actively involved in philanthropy.

Both individuals may share the same high-level goal, but their widely diverging definitions of that objective necessitate vastly different funding considerations. This crystallization and alignment of your goals with specific funding sources is the essence of goals-based planning – giving purpose and meaning to your investments. And when you can envision exactly what you are saving for, your likelihood of success dramatically increases.

“A goal without a plan is just a wish.”
                          – Antoine de Saint-Exupèry

Individual goals don’t exist in a vacuum

Think back to that introductory Economics class you took in high school or college. Do you recall the discussion regarding “opportunity costs?” In addition to the explicit financial cost of purchasing something, there is also an implicit cost – the cost of not being able to purchase something else with those funds. That same principle holds true when it comes to planning for financial milestones.

Rather than looking at individual milestones in a vacuum, goals-based planning helps you to not only prioritize all of your financial objectives, but also to understand the interactions that various competing goals may have on each other. For instance, if you’re committed to fully funding four years of your child’s education at a private university, then you may need to take on additional investment risk elsewhere in your portfolio, scale back on the scope of one or two of your other goals, or opt to retire later.

Perhaps most importantly, the goals-based planning process serves as an invaluable tool to help keep you on track and avoid the common pitfalls that derail so many investors – basing their decisions on short-term emotions and feelings rather than adhering to long-term objectives. The study of behavioral finance points to two key instinctive behaviors that often keep people from successfully reaching their investment milestones. Status quo bias describes our natural inclination to choose the familiar over the unknown. It’s why we tend to put off important decisions and why we typically err too much on the side of caution. Similarly, present bias describes our tendency to place a greater value on a smaller short-term reward than on larger rewards received further off in the future.

By adhering to the discipline of a long-term, goals-based plan, however, these and other common behavioral biases can be more easily overcome.

Helping you get on track

With over 50 years of experience in managing client assets and helping clients set and achieve their goals and plan for the future, we are well aware of the many benefits of goals-based financial planning. One of the key outputs of the financial planning we do is a recommended asset allocation model that incorporates your risk tolerance preferences and your financial goals. Your recommended asset allocation model will be designed to minimize risk in your portfolio while at the same time offering you the potential for reward (aka growth) over time. As a general rule and as you would expect, riskier or more aggressively allocated portfolios have a higher equity component, a lower bond component, and offer the possibility of more return. More conservative portfolios, on the other hand, usually feature a higher bond component, a smaller equity component, and offer the possibility of less return. During the planning process, we help you figure out where you are on the risk tolerance spectrum and also help you measure what you will need to earn over time in order to hopefully achieve your goals. Sometimes, there is a mismatch between the amount of risk a client is willing to take on and the returns they will need in order to have a chance of achieving their goals. When this happens, we help clients understand the choices they may need to make and the options they may have to better align their risk-reward ratio.

The key is to build a flexible plan that grows and adapts as a client’s needs, wants, and financial and personal circumstances inevitably change over time. In addition to developing a financial plan, we can help you explore the pros and cons of various strategies including:

  • Developing a stream of income in retirement
  • Increasing your savings rate
  • Retiring earlier or later
  • Social Security timing
  • Adjusting the scope of your goals to better align with your financial circumstances
  • Altering the risk and return characteristics of your portfolio

Your BLB&B advisor is always available to explore your planning options and work with you to identify the recommended actions that will most positively impact your ability to reach the milestones you have set for yourself and your family.