Ok, here is the continuation:
Clearly defined goals
Whether you are at retirement now or not, having clearly defined goals can mean the difference between retiring comfortably, and working forever, never know what you are working for. What is your goal for retirement? To save ‘some’? Did you pick some arbitrary number, like say $1 million, that may be unattainable (by the way, less than 3% of Americans have a net worth above $1M) or unnecessary?
I tell my clients all the time, “if you don’t know where you are going, how will you know if you get there?” Goals are also very rarely as simple as one number. I wish that retirement and savings could be that simple, but unfortunately it isn’t. You have to save for retirement, but maybe you are saving for your retirement home as well. You are probably saving for a college expense for kids or grandkids. Perhaps you want to travel for a year once you retire. All of these goals have distinct time frames and distinct levels of necessity (i.e. buying yourself a Ferrari when you retire is a great goal, but not as important a goal as say, having enough income to pay your monthly bills.) Because these goals have distinct characteristics, how you save for each one could be very different.
Once you create your goals, you want to assign specific assets to each. This gets a little more complicated, but can still be conceptually simple. This IRA is invested aggressively, for retirement in 25 years. This brokerage account is invested moderately for college in 5 years. Etc. If you have multiple goals (and we all do!) why do you only have one investment strategy?
Easy to understand investments
Sometime I wish investments were easy. A lot of clients get so frustrated with the complexity that they just do nothing. But this doesn’t need to happen! Even if you don’t understand all the intricacies of an investment, you should still have a solid understanding of the basics of your investments. My advice to clients is this: “if you can’t explain, at a basic level, how your investments work to someone like your neighbor do NOT buy them”. There are two things involved in getting to this point. The first is, if your advisor can’t make you understand the investment, there is a good chance he or she doesn’t fully understand it either and you should avoid them. The second has to do with trust. An advisor can explain the basics to you, but it is unrealistic to expect that you will fully understand every detail of that investment. We spend days and weeks studying these things and some of it just can’t be distilled down for a lay-person. You MUST believe that your advisor has your best interest at heart, because a certain amount of trust in this case is going to be mandatory. My advice? Understand how your advisor gets paid and you will understand how (or if) they are incentive to help you.
With that being said, you should still know the basics. What are the potential rewards? How much is this expected to earn in the long run? What are the potential risks? How much could I lose? What would have to happen for me to lose 5%, 10% or 50%? Is this investment more expensive than another? If so, what benefit am I getting for that extra cost? There are very few ‘bad’ investments out there. It is much more common for a good investment to be used in a bad way.
Once you understand the risk and rewards, you also need to know how these risks and rewards work with your goals. You might have an investment that has a great return potential, but could be down 20% in a given year. This would not be a good investment for your 15 year-old’s college fund, but could be very appropriate for your goal of retirement in 30 years. You might think that, because you are retired, you should be conservative and put lots of money in the bank. This might be appropriate for some money, but these accounts will always underperform inflation.
If you do this properly, it becomes very simple to have a good handle on your financial plan! I have been told that it works like magic… You know where you want to be and why. You know what assets are working for you towards those goals and how. So with a couple quick updates (remember clarity?) you can easily see if and how much progress you are making towards your goals.