“If you don’t know where you’re going, any road will take you there.”
— Lewis Carroll in Alice’s Adventures in Wonderland

In my previous column, I talked about the complexities, yet importance, of comprehensive financial planning (aka “wealth management”).

Let’s assume you have taken the first step of admitting you need to do some planning and are committed to making it happen. The next step is goal setting — spending the time to think about what you want your future to look like. Otherwise, any road truly will get you there.

Note that too many financial firms prefer to start talking about investments first — but it seems to me that’s a “ready, fire, aim” approach.

So, start with where you want to go.

I recommend setting “SMART goals” which are Specific, Measurable, Achievable, Realistic and Time-bound. Let’s apply this to planning for retirement, which a recent Gallup survey named the top concern of more than 66% of Americans.

• Specific: Make sure you define your goals carefully and clearly. For example, “I would like to be able to enjoy a secure and comfortable retirement without having to worry about running out of money.”
• Measurable: The goal needs to be something you can measure. For example, “I would like to retire with inflation-adjusted/after-tax spendable income of $10,000 per month.”
• Achievable: Set a goal that you can likely achieve. If you’re already 55 years old and have little set aside, retiring in a few years is likely not achievable. But if you’re 45, have a nice nest egg and are willing/able to save regularly, retirement in 20 years seems achievable.
• Realistic: Ensure you can actually meet the goal. For example, if you’re currently taking home $5,000 per month — or $25,000 per month — the $10,000 target noted above may not be realistic for you.
• Time-bound: Give your goal a time frame so that you can plan for success. For example, if you are age 45 and would like to retire at age 65, you have 20 years to reach your goal.

For purpose of discussion, let’s use this SMART goal: “John and Jane Doe are both age 45 and would like to retire with an after-tax/inflation-adjusted income of $10,000 per month at age 65.”

The next logical step is to consider resources toward meeting this clearly defined goal. They may include Social Security, pension benefits, retirement savings plans, personal investments and perhaps other items:

• Social Security. Click here to get benefit projections online from the Social Security Administration. You may want to plug in the full projected benefit — or perhaps some reduced percentage, given concerns about the system’s solvency.
• Pension benefits. Traditional pensions are becoming less common but can provide a guaranteed lifetime income if you have one. Your company’s human resources department should be able to provide you with benefit projections.
• Retirement savings. These can include IRA, 401k, 403b, profit-sharing, and even ESOP plans. Use current statements that show current balances — and then include how much is being added to these plans regularly.
• Personal investments. This can include savings and investment accounts that are held for the long-term — not short-term — savings needs/goals. Current statements show balances — and again include how much is regularly being added.
• Other items. This might include investment real estate, business interests and even potential inheritances. Caution: don’t count your chickens before they hatch.

With SMART goals and accurate financial information, you’re now prepared for some number crunching.

And unless you’re a mathematical genius with lots of time on your hands, you’ll need access to financial planning software.

Note that these planning tools can range from very rudimentary to highly sophisticated — with better answers typically provided by better systems. But as always, “garbage-in/garbage-out” makes results highly dependent on your inputs.

Better systems allow settings for retirement spending and age targets, inflation, taxes, investment returns and life expectancy.

The best systems offer “Monte Carlo” testing designed to provide a range of outcomes under randomized return and/or life expectancy scenarios rather than just a single average result.

Using John and Jane Doe’s SMART goal, let’s assume the financial planning tool showed a 75% chance of success in meeting spending targets to age 95. That means there is a 25% chance of running out of money during retirement.

John and Jane could simply accept this risk — or they could decide to improve their odds for success by working longer/retiring later, by increasing retirement savings, seeking higher investment returns, or perhaps some combination of these.

The plan could then be re-run with these modifications to see if the results are acceptable. 

Caution: It’s easy to “assume the problem away” simply by using a higher assumed rate of return on investments — but what happens if your investments don’t earn that much?

It has long been my experience that using realistic assumptions is prudent. Remember, this kind of planning is a PROCESS, not an EVENT.

Life has an amazing way of bringing unexpected changes that need to be factored into your plans. Periodic planning updates will allow you to make any midcourse corrections needed to stay on-track in meeting long-term goals.

Once you have a well-thought-out plan in place, you can then move to investment planning. You know where you’re going and have a plan — a roadmap — to get there.

Ready, aim, fire. Look for for my next column on investment strategies.