As fiduciary advisors, our team has the privilege of meeting numerous plan participants each week. Recently, two participant meetings stood out to me. The first meeting involved an enrollment discussion where I was helping an individual decide how much of their salary to contribute to their retirement plan. Amidst the many considerations participants face during enrollment—like choosing beneficiaries, deciding between Roth and Pre-Tax contributions, and selecting investments—this decision seemed straightforward for this individual. Gone were the complexities of affordability and optimal savings rates. For them, the focus was solely on the employer match. In this instance, the answer was clear: 6%. The company followed a popular safe harbor strategy, matching 100% of the first 1% contributed by the participant and 50% on the next 5%. In essence, by contributing 6% of their salary, participants effectively saved 9.5% towards their retirement, including the employer's contributions.
Many individuals find that saving 9.5% towards retirement may not suffice. This is where goal-based financial planning becomes crucial. Collaborating with financial professionals who begin with essential questions is imperative. When do you plan to retire? How much monthly cash flow, adjusted for today's expenses, will you need for a comfortable retirement? Are extensive travel plans part of your retirement vision? What is your estimated Social Security income? Additionally, what tax strategies do you employ, and do you engage in charitable giving? Addressing these and other pertinent questions can help individuals determine the appropriate percentage of their income to save for retirement. While employer matches, if available, offer advantages, they should not be the sole basis for preparing for one's future.
Many individuals who work with financial professionals outside of their workplace retirement plan are accustomed to this level of planning—or should be. However, we often find that workplace retirement plans fall short in providing participants with this level of comprehensive planning. This needs to change.
Understanding Goal-Based Financial Planning
- Goal-Based Financial Planning involves individuals outlining their future objectives. For instance, someone might aim to retire at 65 with a monthly budget of $6,500 for living comfortably, interspersed with biennial travels costing $10,000 each, and anticipate purchasing a new car every decade during retirement.
- Also taken into consideration with goal based planning are factors such as longevity, tax implications, risk strategies, and estate planning considerations.
Why Goal-Based Planning Matters for Retirement
1. Clarity and Focus
- Helps individuals articulate what they want from retirement.
- Provides a clear roadmap to achieve those goals
2. Customization
- Every individual's retirement needs and aspirations are different.
- Goal-based planning allows for a personalized approach
3. Motivation
- Having tangible goals can motivate savers to stay disciplined.
- Progress toward specific goals can be tracked, boosting confidence.
Steps to Implement Goal-Based Financial Planning
1. Assessment
- Evaluate current financial situation.
- Identify retirement goals (e.g., lifestyle, healthcare, travel)
2. Setting Goals
- Break down retirement into specific objectives (e.g., retirement age, income needs)
3. Planning
- Develop a strategy to achieve each goal (e.g., savings rate, investment strategy)
4. Monitoring and Adjusting
- Regularly review progress and make adjustments as necessary (e.g., changes in income, market conditions)
Tools and Resources for Goal-Based Planning
- The most common tools available to retirement plan participants for goal based financial planning are calculators made available on recordkeeper websites or financial planning apps.
- With a multitude of tools available, academic research has also explored the impact of financial advice on individual outcomes. Studies often find that advisor-led financial planning correlates with better retirement savings rates, more diversified portfolios, and improved overall financial wellness. Plan sponsors and stakeholders of workplace retirement plans should prioritize providing access to advisors who can guide participants through the retirement planning process, should they desire assistance.
Secure Your Retirement with Goal-Based Financial Planning
Incorporating goal-based planning into workplace retirement plans is essential for ensuring participants achieve their financial objectives effectively. By setting clear, personalized goals—whether it's retiring at a specific age, maintaining a desired lifestyle, or planning for future expenses like travel or healthcare—individuals can navigate their retirement journey with clarity and confidence. This approach not only empowers participants to make informed financial decisions but also encourages long-term saving habits that align with their aspirations. Ultimately, goal-based planning transforms retirement from a distant milestone into a well-orchestrated journey towards financial security and fulfillment.
Make planning accessible to participants today. We can help.