Removing the worry about how to deal with multiple financial planning issues when it seems like there’s just not enough money and maybe not enough time
-William H. Keffer, CFP®, ChFC®, CLU®, CDFA™
“I’m concerned about the cost of healthcare, surviving a period of unemployment, paying for college, digging out of debt, and saving for a secure retirement. I can’t see how I can manage all of this. It’s really hard to save as much as I am now, and I’m afraid that’s not going to be enough.”
Although the words are mine, they could just as easily be those of any number of new clients who come in for an initial Get Acquainted meeting. The emphasis changes from person to person, usually depending on their age.
The over-45 crowd is worried about the craziness in the stock market, healthcare issues and retirement. The 30-to-mid-forties folks are usually wrestling with loans and looming college costs. For people in their 20’s, it’s about the first house and the possibility of getting laid off.
All share the same basic problem though: Making adequate provisions for multiple goals with different time horizons can be complicated. And no one has or makes enough money to not have to worry about this. Well, at least no one I’ve ever met.
Not Part of the Curriculum
I won’t claim to have been paying attention 100% of the time, but I don’t recall any section in my Certified Financial Planner curriculum, MBA program, or countless continuing education courses that dealt specifically with juggling multiple priorities.
When I first started doing comprehensive financial plans, I searched for a formula but with no luck. The financial planning software is sophisticated and robust. It allows the planner to model multiple scenarios with lots of variables. But the software does not suggest what to model. Moreover, the scenarios and the variables have to be realistic for the particular client’s circumstances.
I finally put together a process that I think does a pretty good job of charting a course to successful realization of multiple goals with different “due dates” over time. And, I think it does this within the client’s means. After all, if they can’t handle the loan payments and savings goals, the best plan in the world will be worse that worthless.
Fanatic about Goals
As with all good financial planning, the process starts with the clients’ goals. It is critical to (1) identify, (2) quantify, (3) schedule, and (4) prioritize what’s important. We – the clients and I – must know what, how much, when, and how crucial each of the major financial events in their lives will be.
The biggest and most important objectives are usually more about security than gratification. At the end of the day, even the best-off among us want to be a sure as they can that their worst fears about retirement security, care for their loved ones, or losing a nest egg are thoroughly addressed. Stuff like the Corvette and the house on the beach usually takes a back seat.
For each goal, it is important to establish ranges. What are the ideal and the minimum amounts that will be acceptable? When would you like it to happen and what’s the longest you are willing to wait?
Finally, priorities must be set. All of us have a tendency to over-value things that will happen sooner. But for most, retirement income and adequate healthcare coverage are numbers one and two.
Where’s the Money?
Resources include current assets (money that’s already been saved), dependable future income sources (Social Security, a pension), and money that can realistically be saved.
If existing assets or sure sources of income sufficient to address a given need have already been secured, the problem is obviously solved. Most of the time some level of additional saving is required. Determining how much it takes to accumulate X dollars in Y years is a relatively simple “future value” calculation, familiar to all of you who stayed awake during Finance 101. For most people under 60, future savings is a major part of the equation.
Lucy and Ethel in the Candy Factory Assembly Line
On paper, the client’s financial plan would be simple. Calculate the amount needed per month to fund all future goals and to pay off all debts in the targeted timeframes and add them up. This would be the clients’ Savings and Debt Reduction Plan.
Of course, the reality is much more like the iconic I Love Lucy where Lucy and Ethel are [somehow] working in a candy factory and the pace of the automated process quickly overwhelms them.
Similarly, clients asked to save and reduce debt at an unrealistic level quickly become overwhelmed and give up on the whole process. Despair leads to bad decisions, like abandoning even the most important basic parts.
Dose of Reality
If you ask me to make a stretch goal that I’m reasonably well-prepared to reach and it’s something I’m really concerned about, I am likely to be successful. And, I’ll probably thank you for making me inflict upon myself the necessary pain.
On the other hand, if you tell me I must accomplish an unrealistic goal and my only motivations are trust in your guidance and fear of the consequences of failure, my inevitable failure will result in a loss of faith in you and the process.
This is why it is critically important to structure savings and debt reduction schedules within a phased and prioritized construct. I must be able to do what you are asking, perhaps with some pain, but not at a level beyond my grasp.
Accordingly, I start by asking the clients what they feel they can comfortably allocate to debt reduction and saving each month. Most people are not really sure. The best way to get at it is to take their gross income and subtract taxes, regular recurring savings, and loan payments, and assume they are spending the rest.
For example, a middle-age couple might be paying 12% in taxes, saving 15%, and paying off loans with another 18%. This obviously means they are spending 55% of their income. If a quick check of their ability to fund their stated goals at this level of saving says they are not going to make it, we need to do more. Depending on the circumstances, it is often reasonable to expect clients to be able to allocate as much as 50%-55% of their gross income to combined debt service and saving. The key is to break the plan into manageable phases.
One Step at a Time
I start by doing future value calculations to see what needs to be saved each year to reach each goal and to pay off each loan. These are entered into a spreadsheet with multiple phases. The phases are separated by the achievement of a particular goal, which then frees up money for goals to be addressed in the subsequent phase.
For example, the clients’ plan might call for four years of heavy emphasis on building an emergency fund, paying off credit cards, and accumulating cash for the next car. After these basics have been achieved, dollars earmarked for the credit cards and emergency fund can now be redirected to the next phase’s goals, which might include a college fund and repayment of some longer term debt. In the third phase, college might be out of the way and heavy emphasis now goes on retirement saving.
Note that in all phases, care is taken to be allocating some portion of savings to retirement. At no time is an employer match passed up. In each phase, the total percentage of gross income dedicated to all goals can not exceed the maximum reasonable percentage that has been established. This is constant testing for viability is a crucial part of the process, because if it is not realistic, the plan will fail.
Checking for Goal Achievement
As the various phases of saving/debt reduction are pieced together, the scenarios are plugged into the financial planning software to make sure that this combination of changing savings patterns over time is projected to achieve the clients’ goals.
This is where the software is crucial. Because it will automatically do the tax calculations (including penalties) and keep track of savings coming in and spending coming out, it makes fast and efficient a testing process that would otherwise be too tedious, time-consuming and error-prone to be practical.
Eventually, after several trials and errors, we come up with a phased savings and debt reduction plan that should be sustainable for the client and effective in providing the money that will be needed for major life goals as they come due. And, all of this must be projected to occur with an acceptable 75% or higher probability of success.
When all is said and done, clients will normally be accepting of a Plan and the sacrifice that it imposes on them if they understand that it is based on realistic assumptions and charts a clear path to their goals. For most, the goals revolve around fundamental security issues, like paying for retirement, healthcare, and fulfilling responsibilities to loved ones. Accordingly, they are highly motivated. But in spite of their motivation level, it is the realism and clarity of the Plan that make it viable and sustainable in the long run.