403(b) Savings and Concurrent Financial Goals
September 12, 2023
By Barbara O'Neill, CFP®, AFC®
Goals are a declaration of what an individual or family want to achieve in the future. One of the best steps people can take to improve their finances is to write down specific financial goals- and then take action to achieve them. When you set short-term (up to 3 years), intermediate-term (3 to 10 years), and long-term (over 10 years) financial goals, you can calculate how much money you need to save on a regular basis.
For 403(b) plan participants, retirement is a high priority long-term goal for which they sacrifice a portion of current income. However, it is likely not their only goal. They may also be saving for goals like unexpected emergencies, a down payment on a car, a vacation, and post-secondary education for themselves or children. “Goal competition” can occur when the greatest barrier to achieving a financial goal is….other goals.
This post explores financial goal-setting including the benefits of having goals, SMART goals, sequential and concurrent goal-setting, the cost of delayed savings of financial goals, and how to save for multiple goals. It also summarizes research about financial decision-making and the value of goals-based financial planning, as well as three “need to know” facts and six take-away action steps.
Benefits of Goal-Setting
Financial goal-setting is like planning a trip. To determine action steps for both goals and a travel itinerary, you need a starting point, a destination (i.e., definition of successful goal completion), a time frame, and cost figures. Why set goals? Goals provide focus, motivation to save/invest current income (instead of spending it), a “reality test” for dreams, a reference point for progress, and a feeling of satisfaction when completed.
Goals also provide a framework for investment decisions and help narrow down choices. For example, if you have a short-term goal, like a cruise in two years, you want to keep this money liquid so there is no loss of principal. Equity investments like stock or growth funds would be a poor choice due to the historical volatility (read: risk) of the stock market in short time frames. On the other hand, if you have a long-term goal, like retirement in 2050, cash assets are a poor choice due to the risk of loss of purchasing power.
SMART Goals
Regardless of time frame, financial goals should be SMART, an acronym for Specific, Measurable, Achievable, Realistic, and Time-related. Start by answering the questions who, what, when, where, and why. Since this is YOUR goal, begin your goal statement with “I/We.” State exactly what you want to accomplish and include a dollar amount and a target deadline date in your goal statement. Here are three examples:
- By the year 2026, we will save $20,000 for the down payment on a townhouse
- By the time my child is 18 in 10 years, I will have $40,000 saved to partially pay college tuition
- In ten years, I will have $50,000 saved in my 403(b) retirement plan
Keep re-writing financial goals until they are specific and achievable. Then tell others about them so they can hold you accountable.
Below is a simple template for writing SMART financial goals:
Types of Goal-Setting
Basically, there are two ways to save for multiple financial goals: sequential and concurrent. Each method has pros and cons, as indicated below:
Concurrent Goal-Setting
This means working on (i.e., saving for) two or more financial goals at the same time (e.g., an emergency fund, savings for a car, and 403(b) plan deposits). Think “financial multi-tasking.” The biggest advantage of concurrent goal-setting is that savings for long-term goals (e.g., 403(b) contributions) is not delayed, resulting in a potential “Million Dollar Mistake.” Two disadvantages are extra record-keeping required for multiple goals and smaller deposits for each goal because savings dollars need to be spread around.
Sequential Goal-Setting
This means working on one financial goal at a time in a series of steps. Perhaps the most well-known example is Dave Ramsey’s “7 Baby Steps” which starts with a starter emergency fund (baby step 1) and does not get to retirement savings until baby step 4 after a full emergency fund is saved and all debt (except a mortgage) is repaid. Advantages include greater focus and record-keeping simplicity. A big disadvantage is that compound interest is not retroactive if it takes someone a decade to get around to 403(b) plan savings.
The Cost of Delayed Savings
How much money is lost by sequencing financial goals instead of saving concurrently? A lot! The earliest years of savings toward a long-term goal such as retirement are the most powerful ones. Using the Rule of 72 that estimates how long it takes to double a sum of money, you can double savings in 9 years with an 8% average return. By delaying long-term goal savings, you can lose a full compound interest doubling period!
Let’s look at this in dollar terms, where the amount of money lost by postponing savings for a goal like retirement is substantial. Let’s assume a potential 403(b) participant is weighing concurrent vs. sequential goal-setting and is reviewing the graphic, below, with data derived from the Delaying Savings Calculator.
Note that savings is postponed nine years in the example, the assumed return is 6%, and savings is done for 30 years (early saving) versus 21 years (later saving). The cost of postponing savings is $120,971.47!
Source: Trustone Financial
How to Save for Multiple Goals
The easiest way to save concurrently for multiple financial goals is to, first, calculate how much needs to be saved for each goal using a worksheet like the one below. Note that the monthly savings for each goal is calculated by dividing the amount needed by the number of months to save. Specialized online calculators such as the FINRA Retirement Calculator can be used for more complex retirement savings analyses.
Source: Rutgers Cooperative Extension
The second step is to add up the total amount of monthly savings for all financial goals (e.g., $100 for emergency fund + $200 for car + $200 for vacation + $250 for 403(b) plan = $750) and adjust the numbers, as needed, to “fit” your budget. This may require a longer time frame until certain goals are reached.
Lastly, figure out a record-keeping process that works for you. Some people use one savings account and a spreadsheet that breaks out periodic savings for each financial goal. Others prefer to use multiple savings accounts, even though there is more management (e.g., statements, tax forms) involved.
Research Results
A study by Blanchett found that goals-based financial planning is effective and motivating for investors. Specifically, using a goals-based framework led to an increase in client wealth of more than 15%. He recommended focusing on accomplishing goals instead of outperforming benchmarks like a market index.
Another study by O’Neill et al. explored financial decision-making by young adults. Results indicated that many respondents were sequencing financial goals, instead of funding them simultaneously, and delaying homeownership and retirement savings. Phrases like “once I have…,” “after I [action],” and “as soon as…” were noted frequently indicating a hesitancy to fund certain financial goals until achieving others (i.e., sequential goal pursuit). Example: delaying retirement savings until student loans were repaid.
Three (More) Things
- Financial goals are personal and vary among individuals. They reflect personal values (i.e., beliefs about what is important to people). Examples of values include: family, fun, loyalty, achievement, and security.
- SMART goals include built-in progress metrics. For example, if you want to save $5,000 in two years, half of that amount ($2,500) should be saved at the end of year 1.
- 403(b) plans are an investment account for a long-term goal. Therefore, it is smart to prioritize growth over safety and save concurrently for retirement with short- and intermediate-term goals.
Six Smart Strategies
No. 1: Start With Dreams — Envision what life after work will look like. Where will you live and what will you be doing? Dreams can serve as the foundation for SMART financial goals with a time deadline and dollar cost.
No. 2: Consider Opportunity Costs — Consider what you will lose by focusing on only one financial goal at a time. Opportunity cost is what you give up by doing something else with your money.
No. 3: Share Your Goals — Tell important people in your life about your financial goals so they can support you and hold you accountable. People with social support and encouragement are more likely to succeed.
No. 4: Use Accountability Tools — Find resources to help you achieve financial goals. Examples include spreadsheets, online calculators, calendars, post-it notes, automated text messages, and automatic investment deposits in 403(b) accounts.
No. 5: Give Yourself Grace — Pick yourself up and keep saving when events happen in life to throw savings for future goals off-course. Forgive yourself just as you would with others.
No. 6: Reward Yourself — Give yourself small rewards as milestones toward goal achievement are reached. Milestone example: each additional $5,000 in 403(b) plan savings. Do something fun that you enjoy (e.g., eating at a nice restaurant).
In Summary
Financial goals are your “north star.” What people think about (and plan for), they bring about. Start a 403(b) plan early and fund it regularly. Delays or lapses of just a few years can result in significant amounts of forgone savings and compound interest.
This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.
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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.