Thank you for checking out Telos Financial’s Plan for your Purpose financial planning blog for millennials. The purpose of the blog is to introduce financial planning topics I believe are important. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
“How much should I be investing?” This is a question I receive quite a bit. I’ll start with the advice I always give and that I consider to be the best. The best way to know this is to get a financial planner, work a financial plan, and follow that with periodic check-ups to make any adjustments. You should always consult a professional for complicated planning; investing, taxes, legal, financial, etc. If you choose to create your own financial plan, it can give you confidence to talk with a professional to make sure you’re not missing anything.
By having a plan, you can always know how you are doing from a financial check-up point of view, if you’re on track, behind, or ahead. As the markets fluctuate, you will most likely be ahead or behind of the target at certain times, but the long-term trend in your investments is what’s important. Once you’ve set up a plan, it’s easier (than starting from scratch) to make updates, tweaks, or goal changes as things change. When investing, there are no guarantees (I mean, there are options backed by the US government or massive insurance companies, which are as certain as their backing, but I can’t use the G word), but some things that are certain, are that there will be uncertainty, we can’t predict the future, and things will change.
What can we do with that? Embrace it and be prepared for change.
Where to start?
All of that said, I think you should always start with being clear about your goals. When do you want to retire? How much do you want to spend in retirement? Do you have a mortgage you want to pay off? Do you have student loans you want paid off? What will you do in retirement? Will you travel more? Will you buy a boat? Will you buy an RV? Or a second home?
If you don’t have firm goals, are too young to know when you want to retire, are going through transitions in life and don’t know what life will look like because of the transition, create some place holder goals. Don’t feel like these have to be set in concrete. Understand they can be changed as your goals and priorities change. Set some goals that feel realistic to you, even though you might want something different later. As an example, maybe you are 30 years old and you set your retirement goal at age 60, but you’re not sure when you want to retire and feel like it could range from 50-70. That’s okay.
One General Strategy
One rule of thumb I like is to save twenty percent of your net income. That, invested in a balanced portfolio based on your risk tolerance and capacity, over the bulk of working career should get you there or in the ball park. There are a lot of assumptions in that, but if you want to ask broad, general questions, you’re going to get ballpark answers. There are a lot of variables with that of course and it’s a soft rule, but is a good place to start if you don’t have any idea on where you want to go, but you want to save.
Now, if you’re not starting to save until you’re 50 and want to retire at 55, you probably need save more. Similarly, if you’re 25 and you want to retire at 35, you probably need to adjust this as well. Whether or not this will help you achieve your goals depends on a lot of factors, this is just a starting place if you don’t know where to start.
If you want to do some budget analysis, there’s a way to separate your spending into categories that plays into this strategy. It’s to break expenses down into fixed or living expenses, variable or fun expenses, and savings. An ideal breakdown is 50/30/20 to these, so 50% of your net income should go to those fixed expenses you need to live – rent/mortgage, utilities, food, internet, etc. 30% is fun – dining out, entertainment, luxury items, etc. 20% is savings, retirement or other goals you have.
Do Some Math
Another way to look at it is to figure out what you need to have in income to live the life you want, and calculate the amount of savings needed to generate that without depleting principal. Without going into the details, you need to choose an income need in retirement and distribution rate you’re comfortable with, from there, you can calculate the portfolio size needed to provide that distribution rate. Then, you do some time value of money calculations to increase it for inflation first, then you need to assume a growth rate and you can back into the amount you need to save on a monthly or annual basis to reach that goal. I know that’s a lot of jargon, but that’s what you do.
There are a lot of assumptions here, so that’s something to be conscious of and understand you’ll probably be wrong because some of your assumptions will be wrong. You can try to err conservatively, but if any of your assumptions are wrong, everything will be wrong. When I run these calculations, I use Monte Carlo simulations because of this. I know if we pick these numbers, we will be off in some way. With Monte Carlo, we can hopefully have a better idea of how safe our assumptions are – while understanding it will still certainly be wrong in some aspects. I think the best way to phrase this is I would rather be vaguely right than be certainly wrong.
If you want to dig deeper into this, you really need to calculate separate savings or investment amounts for each life goal you have. Every goal has a different time frame, different risk parameters, and different place in your priority list. You can itemize the goals, quantify them, and determine these figures as a reasonable way to calculate this.
There are different ways to decide how much you need to be investing to achieve your goals. Many are simple and general guides. I think having a financial plan will provide the most accurate estimate as to how much you need to save to achieve your goals and that’s imperfect because you are making assumptions about the future. You can follow a rule of thumb to get started if you don’t want to go through a full plan at this time.
If this sounds like you and you are a millennial, young professional, or have a young family, Telos Financial may be able to help you. Contact us to schedule a free introductory meeting and we can talk more in person. Telos is Michigan’s financial advisor serving high income and high net worth millennials, recent college graduates, and small business owners.
Telos Financial is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and their families. Dennis LaVoy is a Certified Financial Planner® Designee and a Chartered Life Underwriter®. He founded Telos Financial and to provide fiduciary financial services, including providing investing advice, to families across Michigan including Plymouth, Canton, Ann Arbor, Detroit, and as well as all over the great United States of America.