By Kenney Khew
Researcher Edwin Locke said in his book that individuals who set specific, difficult goals performed better than those who set the easy goals. Locke discovered that people are more motivated by clear and defined goals as compared to other that who don’t.
There are five basic of principles of goal setting:-
5. Task complexity
Goal setting is the second step in a financial planning process. As a licensed financial planner (LFP), he or she needs to go through the fact finding with the clients in the step number two namely gathering data stage.
LFP needs to assist the clients to setting up their golas and aslo priority them according to the client preference.
Many people just take thing for granted in setting their financial goals. Thereafter, they will face a shortage in terms of the goal amount as in reality, they will need to save much more.
Thus, you can use the above five basic principles in the process of setting up for your own goals. Use retirement goal as an example.
Mr A and Mrs A, both 35, want to retire at the age of 65 and their combined annual business income are RM200,000.
Let me explain each one of the basic principles as the following:-
1. Clarity- it means that goal must be clear and specific
Mr A and Mrs A should have clear information on the inflation rate, income replacement ratio, pre and post retirement rate of return, annual incremental rate of the annual income.
Another crucial consideration is whether the couple wants to leave behind some money for their children. If not, the amount will be calculating using utilisation method that does not leave anything behind for your loved ones.
The formula is very simple by using your annual income divided by your expected rate of return. Therefore, if Mr A and Mrs A expected their investment rate of return are 3% then the answer will be RM6,666,666.
In contrast, the retirement amount needed using preservation method will be much more than utilisation method by taking into account the information in the first paragraph.
2. Challenge – Your goals must be challenging
Locke’s study pointed out that people are more motivated whenever they set challenging goals. However, the goals must be attainable.
Let me illustrate by using the above example. Mr A and Mrs A will need to save at least RM70,064 yearly for the next 30 years with the annual interest of 7% p.a.
In fact, they just need to save a total of RM2,117,280 after taking into account the compounding interest rate, towards their retirement age. I am sure that both Mr A and Mrs A will be happy and motivated after achieving this figure at the end of age 65.
After setting challenging and attainable goals, the next important step is to commit to our goals till we have achieved them.
How do we make sure that we commit to our goals? It is important to set our own goals and not follow other figures and information.
This is why engagement of LFP services is crucial in your personal financial planning in order to get professional and independent financial advice.
Mr A and Mrs A can refer to their advisors such as an insurance or unit trust advisor on how to calculate their amount needed for retirement.
The couple is responsible for their own choice and stay committed to achieving their retirement goal.
Normally, a LFP will be reviewing your comprehensive financial planning plan say every three years.
This is crucial to gauge the progress of your planning towards your goals. For instance, Mr A and Mrs A will know whether their retirement planning is running short or ahead as per their plan
Thus, they will take time to consult with their LFP for suitable solutions according to the present situation.
Do take note that there are many so called investment consultants trying to point out underperformed investment portfolio to the prospective clients just because they want them to transfer their investment portfolio to the consultants.
The concept of maximizing profit is not always true in all market conditions. In fact, an investment involve one important element called period of investment.
Therefore, it is hard to make sure that you can maximise profit for all your investment portfolio at all times.
This because investments involve risk especially systematic or undiversifiable risk. For example, political risk, inflation risk, natural disaster, changes in the economy, changes in government policy and etc.
5. Task complexity
We must not set complex goals but should set easy goals or break down the goals or into sub goals so that those goals can be attainable or achievable.
With the assistance from a LFP, they can obtain all the necessary informations such as income replacement ratio, post and pre retirement rate of return.
LFP not only help usunderstand how to attain the amount needed for retirement fund with certain calculations using utilisation or preservation methods; and assumptions.
All these are to ensure the amount is relevant and suitable for their clients.
You will break it down to amount of savings per month in order to achieving your retirement goal and at the same time you can cultivate saving habit and prepare an emergency fund.
Assuming a retirement goal of RM6,666,666, you will need to save RM5,881.53 per month and RM70,576 per year if the average rate of return is 7% p.a for 30 years of investment.
If you choose to establish your financial goals on your own, Locke’s five principles are a helpful guide.
Kenney Khew is chairman of FPAM Johor and also a licensed financial planner of Phillip Wealth Planners Sdn Bhd. He can be contacted at email@example.com