If there was some formula that would almost ensure that your financial goals would be achieved, would you follow it? We wish we could say there is such a thing, but if you had a method that ensured your portfolio was aligned with your goals, you’d want to know about it, right? Here it is, in a nutshell:

  1. Name the Goal 
  2. Put a Price Tag on the goal
  3. Measure a Time Frame required to accumulate the price
  4. Identify your Resources
  5. Calculate Required Rate of Return
  6. Craft a risk-adjusted Investment Plan


Step 1. My goal is RETIREMENT

Step 2. Price. I need to accumulate $1 million before I retire so that I have ample assets to generate income in retirement.

Step 3. Time. I have 25 years before I retire in 2044.

Step 4. Resources. At my income level, I’m able to save $14000 annually in a combination of tax-qualified retirement accounts to hit my million dollar goal.

Step 5. At $14,000 savings a year, I need to earn 8% annually to hit a million.

Step 6. To make 8% on my money, I will invest in a in a diversified portfolio of equity, fixed income and alternative assets exchange traded funds with an 8% return target in a risk-managed asset allocation model.

The process requires a little keyboarding on the old HP-12C financial calculator. Plug in $1,000,000, the amount I think I’ll need for my future retirement. Plug in twenty five years for my time period. I figure taking moderate risk I should be looking for about 8% a year. Not super aggressive, not sleepy, just right. 8%, is less than the historical norm for equities portfolios and about right for balanced portfolios, resulting in a return that matches my risk appetite. 

I push the [pmt] button and voila! I need to save about $14000 a year to reach my $1,000,000 goal in 25 years.  This planning does several things at once:

  • Requires you to name the goal
  • Keeps you focused on the goal
  • Keeps you saving at a steady rate
  • Keeps your risk appetite in line with your goal
  • Encourages you to stay on track and NOT accept more risk than you have to.

If I am confident my required rate of 8% will get me there, why on earth would I want to shoot for 18%, which entails a vastly increased amount of risk? 

Regarding that last bullet, it is critical to understand that when goal planning, your desired rate of return can be quite different from your required rate of return. If I am confident my required rate of 8% will get me there, why on earth would I want to shoot for 18%, which entails a vastly increased amount of risk? 

There are certainly times to increase risk levels in order to seek higher returns, but investment planning is a game of knowing when to play it safe and when to take a flyer.  For instance, retirement and college investing come with measurable time frames and price tags, and thus require both risk planning and time planning.

On the other hand, are there times to take limited amounts of risk capital in order to enhance your overall wealth? Yes, indeed. It’s about picking those infrequent spots quite carefully AND only in context with your overall plan.

So, your homework: Get a #2 pencil and a pad (yes, they still make them) and jot down your goals. Give them a price tag. Figure out  when you want to have them and how long you have to get there. Go online to one of the many financial calculators, or buy your own HP 12-C and start building some serious wealth. Better yet, work with a Certified Financial Planner. This should be a key part of your planning package.

Want a free cheat sheet? Type “Goal Planning Template” in the comments box on the contact page and we will email one to you.