Investing can help you reach your goals with a lot less money than saving alone. But there's a chance that you're still not doing enough.
Your financial future greatly depends on what you do in the present. And you can make sure you're on the right track by doing these three things.
1. Map out your goals
If you start out on a road trip but don't know where you're going, you'll end up driving around aimlessly. And sure, you'll get somewhere eventually. But will it be where you want? When you invest, it's similar. You can sock money away into stocks or mutual funds and over time it will probably grow. But will it be enough?
That's why outlining your goals is the very first step you should take before investing. What will you use this money for? When do you plan on using it? If it's for a goal like retirement, you may not need it for 30 years. And you may need enough to last you for 20 years of not working.
Or maybe it's for your child's college education in 15 years and you plan on using it over a four-year period of time. If college will cost $30,000 a year, you'll need more money saved and invested than if it costs $15,000 annually. And if your retirement income needs are $4,000 monthly, you'll need more saved and invested now than if you anticipate they will be $2,000 each month.
2. Outline any gaps that you may have
After determining your goals, you'll end up with one of three outcomes. The best one is that the amount of money you project you'll have is more than enough and will probably exceed your future needs.
You could also learn that you'll have just about enough but won't have much wiggle room. This might mean that you find yourself in a tight situation if an emergency beyond your basic needs arises.
Your worst-case scenario is one in which you have a deficit. If this happens, there's a good chance that you won't have enough when you expect that you'll need it. You can see below what a retirement planning shortfall might look like.
You estimate that you'll receive $20,000 a year in Social Security payments.
You calculate that your annual expenses will be $30,000.
You'll need $10,000 in income from other sources.
3. Make a plan for your shortfalls
You can remedy this problem by saving and investing more each year now. Studies have shown that if you take 4% in withdrawals from your accounts and have a 60% stock and 40% bond allocation, you can greatly lower your odds of running out of money. Achieving this when taking a $10,000 withdrawal would require a starting balance in the year that you retire of $250,000. The table below shows how much you'd need invested annually to get to this amount given different rates of return and time spans.
The earlier you start saving, the less you'll need to save each year. You'll also need to save less if you earn a higher rate of return, but this comes with a higher level of risk as well. Historically, you could've earned a 10% rate of return if you'd invested in a portfolio made up entirely of stocks. You could've earned 9% on average by reducing your stock exposure to 60% and adding 40% bonds, and 8% with 40% stocks and 60% bonds.
It's also possible that investing more money isn't an option. An equally effective solution could be reducing your bills by $10,000 annually or about $800 a month. Between now and when you retire, you could potentially accomplish this by doing things like paying off a mortgage or reducing discretionary expenses like dining out or travel. Finally, you could become semi-retired and work just enough hours to close this gap.
What you're investing now could be more than enough. But it's also possible that you're not saving enough or investing in a way that would help you better meet your goals. And rather than blindly guessing at whether or not you're doing the best that you can, identifying your goal and how far you are from getting there is a surefire way of being more in control of your future.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.