Personal Finance: Get started on mapping out your financial future

The phrase “financial planning” can mean different things to different people. Experienced practitioners are sometimes employed to produce complex and voluminous documents that address a variety of topics including multi-generational estate and inheritance planning, wealth preservation strategies, charitable giving and family partnerships; the list goes on. Most of us do not have the need (or the assets) for such a complicated, all-encompassing plan. But that does not mean that we should have no plan at all.

In fact, everyone should be familiar with some basic tenets of financial planning, and should begin to put at least a rudimentary plan into action at the earliest possible date. It need not be overly detailed at first, but should serve as a basic roadmap to help you avoid common mistakes and increase the odds of enjoying a comfortable, financially secure lifestyle.

For starters: set a retirement goal. Estimate at what age you would like to be able to call it quits and change careers, pursue an avocation or just go fishing. Of course you are not making an inviolable commitment, but even Google Maps cannot give directions unless you specify a destination.

Next, take a stab at dollarizing this goal. How much income would you like to have (in today’s dollars) to live comfortably in retirement? Often this goal is stated as some fraction of the cash flow received during your last few years at work, say 80 or 90 percent. This range is reasonable since some monthly expenses drop away once you’re off the clock.

Now, plug and chug. There are numerous planning sites, banks and brokerage firms that offer free retirement calculators that grind out a first-order estimate of how much you will need to save and invest in order to attain your desired retirement goal. One easy-to-use example is found at Bankrate.com, but there are many others.

An example: suppose a husband and wife, each 40 years old, together earn a total of $80,000 and wish to retire at age 67. They currently have no savings and expect to enjoy 25 years together after retirement. Assuming no change in Social Security, they will need to amass around $800,000 in savings by the time they head for The Villages, a goal that will require setting aside 12 percent of their annual income. Of course, this computation requires making numerous assumptions, all of which will prove to be wrong. But going through the exercise highlights the degree of commitment necessary to reach the finish line. Clearly without a plan, the odds of successfully attaining this goal are slim indeed.

It should be noted that other important goals also will require advance planning: college funding, basic estate planning (including wills and medical directives), and so on. At some point in the process, you may wish to engage the services of a qualified financial planner to help incorporate additional objectives and address the increasing degree of complexity that comes with success.

Other elements including insurance planning, budgeting and investment management are likewise critical to providing for successful attainment of your long-term goals and the mitigation of risk arising from unexpected occurrences. But the most important step in creating a financial plan is the first one. Imagining and quantifying your most basic objective, like the date and parameters of your retirement, are essential to mapping out the route to success.

Of course, the earlier the better, as time and compounding are the truly magical ingredients. But it is important at any age to see the destination and map out the course. That, in a nutshell, is the essence of financial planning.

Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.