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Truity Credit Union Blog > February 2019 > Setting Long-Term Financial Goals

Setting Long-Term Financial Goals

  • 2/8/2019

Long-term goals are achieved in more than five years. When you are figuring out the total amount you need to save for a long-term goal, it is important to consider the effect of inflation, which, as mentioned previously, is the general increase in the price of goods and services over time. Ever hear someone lament about how a loaf of bread, a gallon of gas, movie theater ticket, etc., only cost a quarter back in the day? Well, inflation is one of the reasons those things cost multiple quarters now.

Start by researching what the cost of the goal is now. Next, figure out the rate of inflation you will use. (You can research what the inflation rate has been historically for your goal, but if you can’t find anything specific, you can use the general inflation rate (typically measured with the Consumer Price Index), which in recent years has hovered around 3%. Don’t worry too much about coming up with a precise inflation rate – even economists sometimes disagree on what to use.)

Keep in mind that the cost of your goal is the after-tax amount that you need.

In many cases, the taxes that you have to pay on your savings may be minimal or nonexistent. However, if you are saving the money in a tax-deferred account, like a 401(k), or expect significant earnings from a taxable investment, then it is a good idea to figure out the pre-tax amount and use that figure when calculating how much you will need to save each month. Doing this will ensure that you have enough money for both your goal and taxes. If you do not know what your tax liability will be, you may want to seek the help of a financial planner or accountant.

Once you know the total amount you need to save, you can figure out how much you should set aside each month. As discussed previously, it is a good idea to factor in the return that you expect to earn on your investments. For example, if you put money in a share certificate, you will be paid dividends. If you invest your savings in stocks, the value of the stocks will likely increase over time, and you may also receive dividends. (Investment options are discussed in more detail later.) Some investments may come with a fixed rate of return that you know ahead of time. If what you plan to invest in doesn’t, you will have to estimate what you expect the return to be. One way to do this is to look at what the return has been in the past – past performance is not always an excellent predictor of future performance, but unless you have a crystal ball, you may have no other choice.

Example 1

You plan on buying a house in seven years. You would like to have a down payment of 10%. You look at home listings and see that the homes you are interested in cost around $200,000. You have already saved $5,000. A real estate agent tells you that home values in your area typically increase about 4% a year, and you plan to put your savings in a mutual fund with a historical return of 5%. The current value of the desired down payment amount is $200,000 x .1 = $20,000. You use the “Future Value” calculator to determine the down payment amount you will need in seven years. You enter today’s date in “Present date,” today’s date plus seven years in “Future date,” $20,000 in “Initial deposit amount,” 4% in “Rate of return,” and leave the “Compound Interest” at annual. You get an answer of $26,318.64. You then use the “Savings Goals” calculator to determine how much you should save each month. You enter $5,000 in “Amount currently saved,” 5% in “Expected Rate of return,” 3% in "Expected inflation", $26,319 in “Savings goal,” and 7 in “Years to save.” You need to save $192 monthly to reach your goal.

Example 2

Your child will be going to college in 10 years. You would like to pay for half of his tuition costs. You look up the current tuition at several schools. The average is $24,000 a year. You plan to put the money in your state’s 529 college savings plan, which in the past has earned an average return of 6%. You have not saved anything yet. Future college tuition can be easily estimated with the “College Cost Projector.” The tuition inflation rate (which is typically much higher than the general inflation rate) is already provided – you need to fill in whether it is a two- or four-year college, current one-year tuition costs, and years until matriculation (start of college). Entering your information in the calculator, you get a result of $209,616.96 for the total projected tuition costs (assuming an inflation rate of 7%). Thus, the amount you want to save is $209,617 x .5 = $104,809 and that you need to save $640 a month to reach your goal.
Check out our tax-deferred education savings account.

Example 3

You are planning on retiring in 35 years. Other than that, you have no idea where to begin. Determining how much you need to save for retirement is no simple task. In addition to considering inflation and rate of return on your investments, you also need to consider what you expect your expenses to be when you retire, how long you hope to live, how much tax you will have to pay on withdrawals, and what your Social Security benefits will be (or if you even want to count on receiving Social Security). Your best bet is to use a retirement calculator or consult with a financial advisor.

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