The start of a new year is often when people set goals for the next 12 months and begin making plans to achieve them. Naturally, this means it’s the perfect time to assess your financial situation and determine how much you might invest in the coming year.
By researching your current budget, you’ll be able to determine how much of your money you can comfortably contribute toward your investment goals. This process also provides useful information for your financial advisor to help guide your decisions.
Whether you’re creating your first investment budget or updating a current one, there are four basic steps you should follow. These ensure that you’ll be able to maximize your investments while still being able to comfortably meet your other financial obligations.
1. Assess your current financial situation
Take a look at your current budget to get a sense of how much money you’re taking in each month, how much you’re spending, and how much you’ll be able to set aside. This process will also update you on the progress you’re making toward any short-term or long-term goals.
Check the past two or three months of your financial activity and plot out the following:
- All sources of monthly income
- Regular monthly expenses including mortgage or rent payments, minimum debt payments, utilities, and groceries
- Discretionary monthly expenses such as gym memberships and dining out
- The remaining principal and interest rate on your debts
- The balance of all of your savings and investment accounts
- Existing contributions toward your retirement fund and other investments
Creating this budget will show how much of your income you could potentially contribute to an investment portfolio. It will also let you determine if there are any areas where you might be able to adjust your spending. For example, you may opt to reduce the amount you spend each month on dining out or cancel some subscriptions in order to have more discretionary income available to invest.
2. Determine how much you can invest
One common recommendation for dividing up your after-tax income is a 50/30/20 distribution, which aims to strike a balance between meeting your basic needs, spending on discretionary items, and addressing long-term goals. This distribution commits:
- 50 percent of your income to essential needs
- 30 percent for discretionary spending
- 20 percent for savings and debt repayment
Investments complicate this model to some degree, as you can consider them as a form of both savings and discretionary spending. Depending on your personal financial situation, you may opt to invest a larger share of your income (such as 25 percent) or a smaller share (10-15 percent).
Even if a larger share of your income goes toward covering basic needs and you only have a small share of your budget available for investing, you can still take this step. One common misconception is that you need to have a substantial amount of money available in order to invest. In reality, you can start an investment portfolio with a modest sum that fits your budget. You can even opt to commit a set dollar amount for investing each month rather than a specific share of your income.
Time is the most important consideration when investing. The earlier you start an investment portfolio, the longer it will have to grow. Committing to regular contributions toward your portfolio, even if it’s just a small amount of money, will allow you to grow your assets more quickly over time.
Look into setting up automations to help support your investment goals. These could include an automatic transfer to shift some of your income to your investment portfolio each time you receive a paycheck.
3. Set your goals for investing
Once you know how much you can comfortably set aside, you should set goals you’d like to accomplish through your investments. Some common goals include having enough money to:
- Pay for your children’s college education
- Make a down payment on a house
- Purchase a vehicle
- Enjoy a nice vacation
Your goals will dictate your investment strategies, since they will help you decide how much risk you’re willing to take on and how long you’ll need to save. For example, saving for retirement takes place over a long period of time and usually includes an adjustment of risk strategy (from higher-risk investments at a young age to more conservative investments as you near retirement). Saving for a children’s college fund is also a long-term process, typically accomplished with a tax-advantaged 529 plan. By contrast, investments intended for wealth accumulation often have a shorter timeframe and may pursue more of a high risk, high reward strategy.
You may decide that short-term financial obligations should take precedence over investing. These could include paying off high-interest debts or building up an emergency fund sufficient to cover at least three months of living expenses. Once you have achieved these goals, you’ll be in a better financial situation and can invest more comfortably.
4. Make adjustments as necessary
An investment plan is not something you set and forget. You’ll need to revisit it periodically and make adjustments to reflect changes to your budget as well as your investment goals.
You may be able to invest more of your income if you receive a raise, pay off a debt, or no longer need to pay for an expense such as child care. However, you may also want to reduce the amount you invest if you have taken a pay cut or are coping with higher expenses.
You should ideally review your investment plan at least once a month with your financial advisor. This will allow you to make adjustments quickly based on any changes to your circumstances.
To set up a meeting with Grey Ledge Advisors, contact us online or call 203-453-9075.
Every major life event comes with a transition period. It happens with children starting school, people getting hired for a new job, and couples getting married. In each of these cases, there’s the initial excitement over a new chapter in your life, the nervousness about what lies ahead, and eventually a comfortable routine.
Retirement is no different. Once you’ve reached that point in your life where you can comfortably leave the workforce and enjoy your newfound freedom, you’re likely to be excited early on, then grow more restless before becoming accustomed to your new situation.
All retirees typically go through a few stages of retirement, whether it’s over a period of a decade or just a few years. Here’s a look at what you’re likely to experience in each stage, and how you might adjust your investment decisions along the way.
The pre-retirement stage occurs when you become more concerned about your post-career life than any advancement or change to the career itself. At this point, you’ll likely be satisfied to continue in your current role until it’s time to retire.
Retirement planning is essential during the pre-retirement stage, which typically extends about five to 10 years before your actual retirement. This is the time to see how your retirement portfolio is performing against your expected retirement needs; if you’re running a little short, you may need to use this time to catch up with additional contributions or possibly pursue a more aggressive growth strategy. If your savings are on track, you may want to shift to a more conservative strategy aimed at preserving the assets you’ve built up.
Assess your current debts and expenses as well as the income sources you’ll have in retirement, such as savings, pensions, retirement funds, investments, and home equity. You’ll also need to consider some major changes that come with retirement, such as changes to your health insurance that come when you move off an employer’s plan and the possibility of downsizing to a smaller home.
By meeting with a financial advisor, you can use this information to set your retirement goals and realistically plan for a lifestyle you’ll be able to afford. This planning should be an ongoing, flexible process that extends into your retirement, helping to ensure that you don’t outlive your assets and that you have enough to leave something behind for your loved ones or a meaningful charitable cause.
As the name suggests, the honeymoon stage is marked by excitement and optimism over your long-awaited retirement. You’re now free to spend your time however you’d like!
This is also a time when retirees tend to splurge a bit, dipping into their savings to take a long-awaited dream vacation. Although it’s a major expenditure, it will also take up a smaller share of your overall savings and won’t have as substantial an impact on its growth potential as it would if you tapped into it later in life.
This stage is a good time to track your income and expenses, monitor your investments, and see how well your assets are supporting you. Your financial advisor can discuss any concerns you may have, and recommend strategies to meet upcoming expenses such as the potential for higher health care costs.
The honeymoon period is usually rather brief. After awhile, retirees start to feel bored or frustrated with the succession of wide open days, and may feel like they’ve lost their sense of purpose.
This stage may also be accompanied by growing concerns about your finances and whether you’ll be able to meet your needs as your retirement extends for several more years. This can also be a confusing time to set a budget due to factors such as required minimum distributions from retirement accounts, Social Security eligibility, and unpredictable health care costs.
This is an especially important time to take long-term care expenses into account and meet with your financial advisor on how you can continue to prepare for them. You should also review and update any documents related to the transfer of your assets in the event of your death or incapacitation, including your power of attorney, will, and estate plan.
During the reorientation stage, you’ve had time to experience retirement and can now consider what adjustments you’d like to make. Reorientation is all about finding a new purpose and pursuing new passions now that you’ve decoupled from work. You may find yourself volunteering more, taking on new hobbies, or creating a bucket list of travel destinations.
Some retirees decide during this phase that they’d like to return to the workforce, although this is usually in a seasonal or part-time capacity. Doing so can help give more structure to your days while also bringing in some extra income.
If you’re earning extra money through a job, your financial advisor can discuss options for investing this money. They can also update your retirement plan to adjust for any financial changes that your reorientation may create.
In this final stage, you’ve established an identity and daily routine you’re satisfied with. This is similar to the routines that come with earlier adjustments in life, but you’ll have more self-direction in your decisions.
Your finances should also be routine, in that your income should be enough to meet your expenses. Your financial advisor can help you monitor your assets to make sure this is the case, and can also help you make any adjustments necessary.
Many older adults have high levels of regret about their finances, according to responses to a 2020 survey of Americans over age 50 conducted by the University of Michigan Health and Retirement Study.
The survey found that nearly 60% of participants regretted not saving more for retirement. Forty percent regretted not buying long-term care insurance, 37% regretted not working longer, and 23% regretted taking Social Security too early.
Financial regrets may be common, but they don’t have to be inevitable. And even if you have regrets about how you prepared for retirement, these errors don’t have to be permanent. There are options for course correction, even after you’ve stopped working.
Here are four tips to help you avoid or mitigate financial mistakes in retirement.
1. Plan for long-term care expenses
One mistake that clients may make after retirement is not considering long-term care planning,
including the potential need for nursing home or assisted living expenses. These costs can deplete your assets and put a strain on your loved ones.
Someone turning 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years, according to the U.S. Administration on Aging. The average person requires care for three years.
You may want to explore options for long-term care insurance and create a comprehensive estate plan that addresses the potential costs of long-term care.
2. Account for inflation
Nearly two-thirds of retirees said inflation and the rising cost of living was the “biggest financial shock” in retirement, according to surveys conducted from January to March 2023 by Edward Jones and The Harris Poll.
Respondents cited inflation as a shock more often than the combined total of the next three top
responses — unexpected medical or dental expenses (22%), major home expenses or repairs (20%), and significant declines in the value of investments (19%).
If your earlier retirement planning didn’t account for high inflation, it might be time to re-examine your retirement finances.
3. Keep managing your investments
Whether it’s to deal with inflation or for any other reason, you might want to revise your investment and/or withdrawal strategies to help your money last in retirement. You should have a retirement income plan in place that matches your current lifestyle.
4. Prepare for surprises
Even with a good retirement income plan, your finances need to be ready to deal with surprises. Unplanned expenses such as a roof replacement or a large unexpected medical bill could cause problems.
Some of these problems might be harder to deal with now than in the past. Higher inflation means those unexpected expenses might cost more than before, while you’re also spending more on the day-to-day cost of living.
Plan to put some of your retirement income aside for unforeseen costs. An emergency fund of three to six months is generally sufficient to cover or defray these expenses.