The start of the year is the perfect time to prioritize both personal and financial well-being. While physical health often takes center stage in New Year’s resolutions, financial fitness deserves equal attention. This is especially true after two years of strong market returns and changing economic conditions.
Just as you might plan your fitness goals, revisiting your financial roadmap can help guide you through the coming year. This could include reviewing your financial situation, setting realistic savings targets, and ensuring you have an appropriate investment plan. In particular, managing your asset allocation in a way that is tailored to your return objectives and risk tolerance is an important way to stay on track regardless of market and economic events in 2025.
So, whether your goals involve advancing your investment plan, building an emergency fund, reducing debt, or growing your retirement nest egg, breaking these objectives into manageable actions can make them less daunting and more achievable. Below are three keyways to get started today.
Resolve to begin investing more to build long-term wealth
There is an often-quoted proverb that states “the best time to plant a tree was 20 years ago. The second-best time is now.” This is because time in the market is one of the most powerful wealth-building tools, thanks to the power of compound returns. When investment returns are reinvested, they can generate their own returns, creating a compounding effect that turns savings into real wealth over decades.
For example, waiting even a few years can have a large impact. For an investor who experiences 7% average returns, beginning to invest when they are 35 rather than 30 means their original $1,000 investment grows to $7,612 instead of $10,677 by the age of 65. The same pattern is true whether those average returns are 5% or 10%. Over the course of an investment lifetime, these differences add up and can become significant. Even small contributions can grow substantially over decades through the compounding process.
What prevents some from investing is the fear of market swings, especially with markets near all-time highs. However, the reason those who can stay invested are rewarded in the long run is exactly because it is difficult to do so. When investors exit the market entirely due to short-term concerns, they create opportunities for disciplined investors to buy at even more attractive prices, setting the stage for higher future returns. This is why keeping a level head, and investing over long periods of time, are the best ways to achieve financial goals (but yes, we have a rules-based approach that'll allow us to raise up to 20% of cash in a portfolio in the very short-term if bad storms seem to be on the horizon and then we redeploy it during the center of the storm..buy low/sell high).
Resolve to review your retirement accounts
The retirement landscape has changed dramatically over the past half century, with a significant shift from traditional pension plans to ‘defined contribution’ accounts. It used to be that most companies offered ‘defined benefit’ (pension) plans, where workers were guaranteed a specific payment amount in retirement. Today, ‘defined contribution’ plans like 401(k) and 403(b) plans are far more common.
This transformation has fundamentally changed our responsibilities when planning for retirement. Today, the burden is on individual workers to ensure they have the right plan in place for a comfortable retirement. Individuals must make decisions about account types, tax strategies, contribution rates, investment allocations, and distribution strategies, which can be daunting for most.
While the trend toward defined contribution plans places the burden of funding retirement on individuals, it also presents opportunities to customize your financial plan. After all, it’s unclear what the future of programs such as Social Security and Medicare may be. This is why it’s essential to become educated on the best approach for your situation, ideally with the help of a trusted advisor.
Resolve to consider the impact of a longer retirement
The fact that life expectancies continue to rise is unambiguously positive. Yet, perhaps the greatest financial risk for any retiree is the prospect of running out of funds, also known as ‘longevity risk.’ The goal of addressing longevity risk is to ensure that retirees can enjoy a long and healthy retirement without worrying about their finances.
Today, savings have to last longer and generate more income than for prior generations. For many, longer life expectancies could mean spending 30 years or more in retirement. Just as importantly, these savings also need to continue growing to support longer and longer retirements, especially during inflationary periods.
Today’s 40-year-old men and women are expected to live to 79 and 83 on average, respectively. However, one in ten could live to 93 and 96, or longer. For those who are already 65, life expectancies are even higher. These demographic statistics suggest that, for many, planning for a retirement that lasts to the age of 80 is not enough – it could extend for decades beyond that.
Factors like healthcare costs, inflation, and sustainable withdrawal rates become even more critical when planning for an extended retirement. It’s clear that understanding and preparing for longevity risk is essential for maintaining financial security. By adding financial fitness to other health and life goals, you can fund a longer retirement and ensure you don’t lose sleep over money.
The bottom line? The start of the year is a great time to set your financial New Year’s resolutions. Saving early, reviewing your financial / retirement / investment plans, and ensuring your portfolio creates enough income and growth are all critical to achieving long-term financial goals.
We hope this is your best year yet..make it happen!
Mike
Our annual family/business 'Strategic Planning Session.' Sarah and I took a quick getaway (from our 3 kids and many other potential 'distractions') this past weekend to Natchez, MS.
We've learned throughout the years to get away from all distractions and to listen/respect each other's opinion/input. So yes, we take the same medication we prescribe here at Cornerstone.
Happy New Year's, my friends!