Have you built the road map to your goals?
Often I’d hear some inspirational goals:
Hypothetical meeting with Penny and Mike, where I teach them to sketch out their goals.
Penny: We’d love to buy a nicer house.
Me: How long until that goal?
Mike: Wow. We haven’t thought about it. I’d say five years from now.
Me: What other goals?
Mike: Let’s talk retirement. I’d like to be aggressive on that part of the plan.
Me: When would you like to do that?
Mike: Let’s shoot for age 50.
Penny and Mike smile.
Penny: We can’t forget Penny Junior. We’d like to at least help with college. How about we pay 2/3 of the cost of an in-state school….for four years.
Me: Good. How old are you all now?
Mike: 39. Junior is 9.
Me: Cool. (standing) Let’s see how these goals work together.
Mike and Penny share a quizzical look.
Me: Okay, here’s the two of you:
(two people drawn, then a line out to the right)
Me: Now let’s add in the house in five years. That’ll change your cash flow pattern. Have you thought about how that’ll affect your ability to save for retirement or Penny Junior’s college?
Mike: We know it’ll be tighter.
Penny: We’d like to make it a nice house, though, because we’ll spend the rest of our lives there, hopefully.
Me: Okay, we’ll talk details later, but that’s our first concern….how does the new house change your cash flow, debt and tax situation. Right now you think you’re saving enough to retire at 50, but will the house affect that goal?
Mike: Agreed. The house can’t hurt that retirement goal.
Me: (drawing again) Here’s junior’s college…and now let’s add in retirement and when you can safely take money out of your IRAs without using SEPP rules.
Sketching Your Goals
Now Penny and Mike can see clearly some issues that they hadn’t yet addressed.
Retirement at 50 falls at the two-year mark in Junior’s education goal.
How will these two goals work together? They’ll be fine if there are dedicated dollars….but what about healthcare? If Mike and Penny have healthcare through work, do they want to abandon that while Junior is in school?
I don’t know, but the reason we even ask is because we mapped out the goals.
Retirement at 50 is a great goal, but Mike and Penny have nine years before 59 1/2 to plan for and haven’t saved a dime outside of their IRA plans. Sure, there are ways to grab those dollars early, but wouldn’t we rather begin building a flexible pot of money to bridge the gap? That could lower the tax bite during retirement immensely.
Drawing out your plan is a ton of fun. Sure, it’s a little scary until you realize that it’s the same procedure you use every time you program your GPS for your next long car ride. Seeing the future is a powerful tool that any serious Stacker uses to achieve financial freedom.