From Charles Schwab & Co.

A comfortable retirement. A new car. A down payment on a house. Paying for a child’s college education. Coming up with a list of future financial goals is generally pretty easy. The bigger challenge is figuring out how you’re going to save for them all.

For most of us, socking a few extra dollars away in a savings account each month may be a good start, but it’s probably not enough, especially if we’re talking about multiple goals. The trick is to think strategically about your goals and come up with a saving and investment plan for each one. A little effort today can help make a big difference down the road.

Here are a few steps you can take as you work toward achieving your goals.

Set your goals

The first step is pretty easy: Write down your goals.

We suggest keeping the list short. If you have 15 different goals, you might struggle to keep track of them all. So think of this list in terms of what’s most important to you and your family — and prioritize. One way to do this is to group savings goals by needs, wants, and wishes, in order of priority.

Saving for retirement will likely be high on the list, and we would also suggest setting up an emergency fund with enough money to cover at least three-to-six months of essential living expenses. Then you could add things like buying a home, paying for college, a dream vacation, a new car or a festive wedding.

Sorting and allocating

Once you’ve made a list, it’s time to sort them by time horizon. Here, you can take advantage of a technique known as “bucketing” that many people use to calculate their retirement income. In short, this involves dividing your money into a series of buckets that hold what you will need in a few months, in a few years or in 10 years or more.

Knowing when you’ll need the money can help you decide what sort of investments you should consider as part of your savings plan. In general, it makes sense to use less-volatile investments for short-term goals, as you’ll have less time to recover from a dip in the market, and more aggressive investments for longer-term goals, as potential returns, can have more room to grow over time. Here’s how it generally works:

Bucket 1

Bucket 1 is where you save for short-term goals say in the next two years. This could include things like a wedding or nice vacation. Consider traditionally more stable investments such as cash, money-market funds or short-term Treasury bonds or certificates of deposit. Putting the money you plan to spend soon into liquid, readily marketable, generally, low-risk investments can help you avoid having to sell other investments, such as stock, in a down market to raise cash.

Bucket 2

Bucket 2 typically holds money that you expect to need over the next three to 10 years. This could include goals like a down payment on a home. Intermediate-term assets such as a mix of intermediate-term bonds or bond funds and stocks, with a focus on growth and capital preservation, make sense for this bucket.

Bucket 3

Bucket 3 typically holds money that you expect to need in 10 years or later, say for retirement or your kids’ college. This bucket should be invested for growth and income, with a larger allocation to stocks.

Note: These buckets aren’t one-size-fits-all. Each should be tailored to your risk tolerance for each goal as well as your time horizon. And be sure to diversify. You probably don’t want the fate of your goals to hang on the performance of a single asset.

Start investing

Once you’ve identified your buckets, it’s time to start putting money in them. Even modest contributions, when made regularly, can pay off substantially over time. You could even consider using a strategy such as dollar-cost averaging, which is when you buy a fixed dollar amount of a particular investment on a regular schedule, regardless of how the price fluctuates. That generally means buying more shares when prices are low and fewer shares when prices rise.

And stick to your priorities. Fund the items at the top of your list first, such as your retirement savings, regardless of what bucket they are in.

Note: You will have to do some budgeting to figure out how much you should save for each goal.

Stay the course

Check on your investments at least quarterly (or more often if you have a more aggressive portfolio). In general, you should consider making your allocations more conservative as you approach your goals by shifting away from riskier investments, such as stocks, in favor of more stable ones, such as bonds. Major life events, such as job changes, the birth of a child or a marriage, may also call for some adjustments.

Regular check-ins also make it easier to make adjustments. For example, if the price of a college education rises faster than you planned for, you might respond by cutting back your spending, increasing your regular contributions or (if your time horizon is long enough) shifting money into more aggressive assets that may generate higher returns.

Remember that you may need to “rebalance” your portfolio occasionally, which involves selling assets that have appreciated and buying more of those that haven’t done as well.  For example, if your stocks appreciate to the point where your stock allocation accounts for a larger share of your portfolio than your target allocation allows, and your bond allocation shrinks, you could consider selling some of the stock and buying more bonds to bring your portfolio back in line with your target.

By rebalancing on a regular basis, you can help ensure your portfolio doesn’t drift too far from your target mix of asset classes. Not rebalancing is akin to letting the market decide your asset allocation over time, which can significantly change your exposure to risk.

Finally, stick to your plan. Down markets can be unnerving. Successfully managing investments requires a long-term view and a commitment to staying on track.


About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or or visit the firm’s website at Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.