If you were offered the choice to go to Paris next week or — for the same amount of money — take a whirlwind tour of 10 European countries 10 years from now, which would you choose?
The future getaway is the better and likely more fulfilling deal — but few of us would be able to resist the draw of strolling along the Seine seven days from now.
Unfortunately, that inability to delay gratification is what’s keeping many of us from building up a healthy nest egg.
Since retirement doesn’t feel like an urgent need, people find excuses to put it off, and instead use the money for something they want right now.
According to an April survey of higher income households by SunTrust, 44 percent of people say that current lifestyle spending on things like dining out and entertainment prevents them from saving for the future. Among millennials, it jumps to 71 percent.
“A large portion of my clients struggle with planning an event that’s often at least 30 years away,” explains Jeff Maas, a certified financial planner and co-founder of Retirement Security Centers. “Since retirement doesn’t feel like an urgent need, people find excuses to put it off, and instead use the money for something they want right now.”
Of course, it doesn’t help that we’re programmed to be highly driven by the amygdala, the emotional part of the brain that seeks pleasure and controls short-term decision making, says Brad Klontz, a certified financial planner and managing partner at Occidental Asset Management.
And let’s not forget that we live in a pervasive “get it now” world. “Social media has created a culture that’s incredibly focused on instantaneous satisfaction,” Maas explains. “I joke that we even tap the microwave [impatiently] while making popcorn because it takes too long.”
So if we’ve got biological and societal influences working against us, how can we focus on saving for a far-off, nebulous retirement?
This strategy involves creating an investment plan with your retirement dreams in mind, rather than chasing a specific return. By focusing on what you’re saving for, you’re helping retirement feel like more than a large (and often intimidating) number to reach — thus making it harder to ignore.
“Very organized people — who have color-coded sock drawers and check the air in their tires every month — probably don’t need that extra nudge to get on a pragmatic savings plan,” Maas says. “But most of us just get in the car and drive until there’s a problem. We defer [saving], saying we’ll do it next year — but we need a dose of reality to force us to take action. We need to feel the urge to save.”
How to Get Your Goals-Based Saving Strategy Going
One of the biggest reasons people have a hard time socking away money is that they don’t identify with the wrinklier, grayer version of themselves kicking back on the beach. But once the connection is made, better savings habits just might follow.
Case in point: One well-known Journal of Marketing Research study asked people to allocate money across several financial goals — including retirement — after viewing avatars of themselves. Some saw representations of how they looked at that time, while others were presented with digitally aged versions of themselves.
Those who saw their future selves put more than twice as much money toward retirement — and goals-based investing helps achieve a similar effect by making retirement more tangible and personal.
“When I’m working with a client, the first thing I do is have them envision their life in retirement and define what is and isn’t important to them,” Maas says. “This gets people excited about their future.”
So take a cue from the Beatles song “When I’m Sixty-Four” and start envisioning some details — like a life filled with Sunday morning drives, gardening, grandchildren and a cottage rental in the Isle of Wight.
It may seem humorous, but painting images like these can help you figure out what may be important to you in two or three decades — and get that pesky amygdala on board. And the more you can describe who you’re with and what you see, hear and feel, the better.
“This practice actually changes your biochemistry by increasing levels of [the happiness-inducing neurotransmitter] serotonin,” Klontz explains. “And if you evoke a very vivid image, your brain can’t tell the difference between it happening in the present or the future — and will react accordingly.”
Sort your goals into three categories: most important, moderately important and least important. This will help you determine what’s a retirement need-to-have versus a nice-to-have.
In other words, your brain will be jonesing to stash more in your 401(k) because it will be so psyched about your golf trips.
UCLA professor and behavioral economist Shlomo Benartzi offers up a more structured visualization approach in his book “Thinking Smarter: Seven Steps to Your Fulfilling Retirement … and Life.”
He suggests writing down your retirement objectives while asking yourself these questions: What do you care about? What are your goals and values? What matters most to you? This could result in a list with items as general as wanting to help pay for your grandkids’ college or as specific as buying a $450,000 second home in Aspen.
Next, he says, you need to uncover your retirement blind spots.
Benartzi’s research found that the most commonly shared retirement goals tend to fall into 12 categories: financial independence, health care, housing, travel and leisure, lifestyle, a second career, self-improvement, family bequests, giving back, social engagement, ending life with dignity and maintaining a sense of control.
After reviewing your list, are there any goals you may have overlooked? If so, add them to the list.
Finally, sort your goals into three categories: most important, moderately important and least important, using the assumption that you have limited resources to allocate to each of the goals. This will help you determine what’s a retirement need-to-have versus a nice-to-have.
Now that you’ve got your goals in place, your next question is likely to be: What does this mean for my portfolio?
Here are some important considerations to keep in mind when viewing your retirement strategy through goals-colored glasses.
1. Your target retirement number may need to shift. One general rule of thumb is to strive for a nest egg that can replace about 85 percent of your annual income in retirement. Goals-based saving can help you have a clearer picture of your retired lifestyle, so you can decide whether you can live on less — or may need to save more.
“If you want to take two big-budget trips every year, you may need to save very differently from someone who plans to retire in a little cabin in the forest,” Maas says.
So once you have a handle on how much you may need to cover day-to-day costs and essentials, tack on cost estimates for your various retirement dreams, making sure to account for inflation. If a first-class vacation to Europe costs $10,000 today, in 30 years that would come out to more than $24,000, assuming a 3 percent inflation rate.
If those price tags seem daunting, keep in mind that your golden years likely won’t be all get-up-and-go.
“The first 10 years of retirement, from ages 65 to 75, may be considered the ‘go-go years,’ when you still have plenty of energy to pursue your goals,” Maas says. “Ages 75 to 85 are the ‘slow-go years,’ when people tend to focus on family — and 85 and onward are considered the ‘no-go years,’ when you typically stick close to home.”
If you want to take the whole family on a cruise one year into retirement, you may decide to take a more conservative approach to your portfolio than if you planned the trip 20 years into retirement.
And make sure to include one-time goal-related costs. Maas, for instance, had a pair of clients who wanted to open a hardware store in retirement, so they had to factor those start-up costs into their retirement number.
2. Your goals could impact your risk tolerance. Although risk tolerance is often thought of as an investing “personality trait” that’s hard to change, looking at your investments through the lens of a goal could make you more or less inclined to take on risk — especially as you get closer to your retirement date.
For instance, if you want to take the whole family on a cruise one year into retirement, you may decide to take a more conservative approach to your portfolio than if you planned the same trip 20 years into retirement, says Maas.
Likewise, how much flexibility you have for the goal itself may also figure into your portfolio moves.
Let’s say you’ve set aside $10,000 of your retirement savings toward a one-month trip five years into retirement. With a more aggressive investment approach, you may end up with enough to splurge on a more expensive dream spot — but if a less prime locale would suffice, you could take a more conservative approach to saving.
“In the end, you enjoy a month-long vacation regardless — but the desire to take on additional risk for a potential additional reward might impact your investment strategy,” says Maas.
3. Your goals can change and you may need to rebalance. What’s important to you now may shift in response to changes in your life, which is why Maas suggests revisiting your goals once or twice a year to determine if you need to rebalance.
Maybe your son just had another kid, so you want to help with future college costs. Or perhaps, on second thought, downsizing your home is more appealing than staying in your current one.
Of course, some of your goals could be met through avenues besides your nest egg.
Maas, for instance, works with a wealthy client who grew up poor and, because of that experience, wants to make sure both of his kids will inherit $2 million. But bequeathing them cash isn’t the only option he has to achieve that goal — there are also life insurance policies, leaving them property or giving them investments.
The bottom line? With a goals-based strategy, as your present life evolves and your dreams get clearer, it can help you better plan for that future you.
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