indicatorInvesting and Saving

Running your numbers? Start with your goals

By Mike Winsor, CFP® 27 July 2022 5 min read

Whenever there is turbulence and uncertainty in the world (market volatility, rising inflation, and the Russian invasion of Ukraine to name a few) a natural reaction is to ask yourself “am I going to be OK?” When it comes to finances, this question can be challenging to answer—especially if you are attempting to self-diagnose. 

In this article, we’ll discuss why it’s better to figure out your goals and plan around them together rather than simply seeking the best or optimal plan by punching it into an online calculator. We’ll also cover some things to think about when discussing your financial goals and well-being with your financial advisor from both a numbers (quantitative) and human (qualitative) perspective. 

 

Quantitative planning

Have you ever met with a financial professional and asked them what the “best” thing to do is—and had them respond with some variation of “it depends?” The introduction of financial planning software (and spreadsheets before that) has led many to consider financial planning a simple calculation: what combination of things maximizes X? 

Most software will nudge you in a particular direction of what “X” should be. Some will try to find what lets you spend the most money in retirement. Others focus on increasing your net worth to the largest number at retirement. Some even focus on creating the largest amount to pass along after you die. This inconsistency can lead to confusing advice and bad outcomes, especially if the end result doesn’t align with your goals (for example, maximizing your estate if you don’t want to leave anything behind). In fact, most quantitative financial planning goals are in direct opposition to one another, as they draw from the same pool of resources (your income and savings). Think of this like two sides of a rope in a tug-of-war. For example, increasing lifestyle spending runs opposite from increasing the value of your estate. 

In reality, it’s rare to have a single goal. Instead of choosing from a list and making one goal your sole focus, ranking the items in the list makes far more sense. This allows you to assess which areas allow for compromise, and which ones are to be maximized—helping you to mitigate the minimum/maximum efforts of the calculations. Being specific with goals and setting target amounts makes this exercise even more effective. For example:

I want to:

  1. Spend at least $80,000/year in retirement (adjusted for inflation).
  2. Leave at least $100,000 to each of my children.
  3. Pay off all my debts by 2030.
  4. Buy a vacation property for at least $500,000 in 2027.

This list is effective in that it clearly ranks priorities (i.e. you won’t be buying that vacation property if you can’t afford  to spend your inflation-adjusted $80,000/year in retirement) and sets targets (i.e. you won’t aim to spend more than your inflation-adjusted $80,000/year in retirement until all your other goals are met).

You can even go the extra mile and assign priorities to further define the hierarchy, which will quickly identify areas for compromise, if needed:

Goal

Priority level
(1=low, 5=high)

1. Spend at least $80,000/year in retirement (adjusted for inflation)

5

2. Leave at least $100,000 to each of my children

3

3. Pay off all my debts by 2030

3

4. Buy a vacation property for at least $500,000 in 2027

1

For example, if you could not meet all of your goals, you may be more willing to give up on goal #4 entirely as opposed to compromising on goal #4 and goal #3. If you have a spouse or significant other involved in your planning, it can be a valuable exercise to compare lists and priorities, to see if they are in alignment – and avoid conflicts or surprises if they are not.


Qualitative planning

Software and calculators can often give the impression that once you’re on track to meet your goals, the best option is to either increase them further (for example, spend MORE in retirement) or find new ones (for example, donate to charity). 

But there are often goals you may want to explore that will give you peace of mind without checking a box in the software. These goals will have a quantitative cost with a qualitative value, so most software will not handle them well. 

Example goal

Qualitative gain

Quantitative cost

Reducing your investment risk

Improved peace of mind resulting from less dramatic changes in value during market downturns.

Lower risk investments are generally expected to have lower returns.

Being debt-free

Peace of mind from not worrying about carrying debt and the risk of rising interest rates.

A sense of satisfaction from having paid off your debt.

In some cases, it may be more advantageous to increase your investments than to pay down your debt.

Reducing hours worked

Reduced stress and increased time to focus on the things important to you.

Reducing hours usually means reducing your income earned and savings.

Retiring early

Reduced stress and increased time to focus on the things important to you.

Taking pensions early can significantly reduce your lifetime earnings.

The loss of earned income will reduce your savings.

Making a large purchase

Adding something to your life that will contribute to your emotional well-being.

Many major purchases decline or hold their value over time instead of keeping up with inflation.

While mathematically most of the items above will be a strict loss to your financial planning results, the qualitative value generated for you may be worth the cost. While some of the more comprehensive financial planning software will capture some of these items within “goal” or “values” modules, many will not, and few (if any) will capture all of the items above.

It can be easy to get caught up in the quantitative side of planning, so make sure to consider your qualitative goals as well. There are almost always important considerations that must be accounted for that are not contained within a given piece of software.

 

Conclusion

Working with a financial advisor is the best way to ensure your qualitative goals are met in addition to your quantitative ones, and is especially valuable when compromise between goals may be required. A financial advisor can also help you to uncover goals which you may not otherwise have thought to incorporate into your planning—including how best to model them.

ATB Wealth experts are ready to listen.

Whether you're a beginner or an experienced investor, we can help.

Chat now
ATB Virtual Assistant
The ATB Virtual Assistant doesn't support landscape mode. Please tilt your device vertically to portrait mode.