How to Save for Multiple Financial Goals

APRIL 12, 2017

A comfortable retirement. A new car. A down payment on a house. Paying for a child’s college education.

Coming up with a list of future financial goals is generally pretty easy. The bigger challenge is figuring out how you’re going to save for them all.

For most of us, socking a few extra dollars away in a savings account each month may be a good start, but it’s probably not enough, especially if we’re talking about multiple goals. The trick is to think strategically about your goals and come up with a saving and investment plan for each one. A little effort today can help make a big difference down the road.

Here are a few steps you can take as you work toward achieving your goals.

Set your goals

The first step is pretty easy: Write down your goals.

We suggest keeping the list short. If you have 15 different goals, you might struggle to keep track of them all. So think of this list in terms of what’s most important to you and your family—and prioritize. One way to do this is to group savings goals by needs, wants, and wishes, in order of priority. Saving for retirement will likely be high on the list, and we would also suggest setting up an emergency fund with enough money to cover at least three-to-six months of essential living expenses. Then you could add things like buying a home, paying for college, a dream vacation, a new car or a festive wedding.

Sorting and allocating

Once you’ve made a list, it’s time to sort them by time horizon. Here, you can take advantage of a technique known as “bucketing” that many people use to calculate their retirement income. In short, this involves dividing your money into a series of buckets that hold what you will need in a few months, in a few years or in 10 years or more.

Knowing when you’ll need the money can help you decide what sort of investments you should consider as part of your savings plan. In general, it makes sense to use less-volatile investments for short-term goals, as you’ll have less time to recover from a dip in the market, and more aggressive investments for longer-term goals, as potential returns can have more room to grow over time. Here’s how it generally works:

  • Bucket 1 is where you save for short-term goals, say in the next two years. This could include things like a wedding or nice vacation. Consider traditionally more-stable investments such as cash, money-market funds or short-term Treasury bonds or certificates of deposit. Putting money you plan to spend soon into liquid, readily marketable, generally low-risk investments can help you avoid having to sell other investments, such as stock, in a down market to raise cash.
  • Bucket 2 typically holds money that you expect to need over the next three to 10 years. This could include goals like a down payment on a home. Intermediate-term assets such as a mix of intermediate-term bonds or bond funds and stocks, with a focus on growth and capital preservation make sense for this bucket.
  • Bucket 3 typically holds money that you expect to need in 10 years or later, say for retirement or your kids’ college. This bucket should be invested for growth and income, with a larger allocation to stocks.

Note: These buckets aren’t one-size-fits-all. Each should be tailored to your risk tolerance for each goal as well as your time horizon. And be sure to diversify. You probably don’t want the fate of your goals to hang on the performance of a single asset.

Start Investing

Once you’ve identified your buckets, it’s time to start putting money in them. Even modest contributions, when made regularly, can pay off substantially over time. You could even consider using a strategy such as dollar-cost averaging, which is when you buy a fixed dollar amount of a particular investment on a regular schedule, regardless of how the price fluctuates. That generally means buying more shares when prices are low and fewer shares when prices rise.

And stick to your priorities. Fund the items at the top of your list first, such as your retirement savings, regardless of what bucket they are in.
Note: You will have to do some budgeting to figure out how much you should save for each goal. Use one of Schwab’s savings calculators if you need help.

Stay the course

Check on your investments at least quarterly (or more often if you have a more aggressive portfolio). In general, you should consider making your allocations more conservative as you approach your goals by shifting away from riskier investments, such as stocks, in favor of more-stable ones, such as bonds. Major life events, such as job changes, the birth of a child or a marriage, may also call for some adjustments.

Regular check-ins also make it easier to make adjustments. For example, if the price of a college education rises faster than you planned for, you might respond by cutting back your spending, increasing your regular contributions or (if your time horizon is long enough) shifting money into more aggressive assets that may generate higher returns.

Remember that you may need to “rebalance” your portfolio occasionally, which involves selling assets that have appreciated and buying more of those that haven’t done as well. For example, if your stocks appreciate to the point where your stock allocation accounts for a larger share of your portfolio than your target allocation allows, and your bond allocation shrinks, you could consider selling some of the stock and buying more bonds to bring your portfolio back in line with your target. By rebalancing on a regular basis, you can help ensure your portfolio doesn’t drift too far from your target mix of asset classes. Not rebalancing is akin to letting the market decide your asset allocation over time, which can significantly change your exposure to risk.

Finally, stick to your plan. Down markets can be unnerving. Successfully managing investments requires a long-term view and a commitment to staying on track.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events can be created that may affect your tax liability.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Schwab Intelligent Advisory is made available through Charles Schwab & Co., Inc., a dually registered investment advisor and broker-dealer.
Schwab Intelligent Portfolios® is made available through Charles Schwab and Co., Inc. (“Schwab”) a dually registered investment adviser and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are affiliates and subsidiaries of The Charles Schwab Corporation.

Please read the Schwab Intelligent Portfolios disclosure brochure for important information.

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Health Savings Accounts: FAQs About HSAs

APRIL 10, 2017

What is a health savings account?

Health savings accounts (HSAs) are tax-advantaged savings and investment accounts available to people with high-deductible health plans. You can set aside money in an HSA, free of federal taxes, to pay for qualified medical expenses. Money saved or invested in an HSA also grows federal-tax-free.  And as long as you spend the money on qualified medical expenses—such as doctor visits, prescription medications, eye exams and dental care—withdrawals aren’t taxed, either.

Why do they exist?

HSAs were created in 2003 to give people with high-deductible health plans a tax break, as many employer-sponsored health plans have shifted more of the responsibility of paying for health care to individuals.

As many as 22 million people now participate in an HSA, and some 72% of employers with more than 500 employees look set to offer these accounts by 2019. That’s up from less than a quarter in 2010.¹

Who can open an HSA?

You are eligible to enroll in an HSA if:

  • you’re enrolled in a high-deductible health plan;
  • you aren’t covered by another health plan that’s not high-deductible (for instance, a spouse’s plan);
  • you aren’t enrolled in Medicare; and
  • you can’t be claimed as a dependent on someone else’s tax return.

As the name implies, high-deductible health plans have higher-than-average deductibles. For 2017, the IRS defines them as requiring annual out-of-pocket payments of $1,300 for an individual plan, and $2,600 for a family plan, among other requirements. You can find more details about HSA requirements in IRS Publication 969.

How do I contribute?

If your employer offers a high-deductible health plan, it may also direct you toward an HSA (some employers even make annual contributions to their employees’ HSA accounts). You can also open an account on your own through a qualified HSA provider, such as a bank or insurance company.

Both you and your employer can contribute to an HSA up to annual limits:

You can make your annual contribution right up to the federal tax filing deadline for that year—for instance, for the 2016 tax year, you have until April 18, 2017, to contribute to your HSA.

However, note that you can’t contribute to an HSA if you’re enrolled in Medicare. If you’re 65 or older and file for Social Security benefits, you’ll automatically be enrolled in Medicare Part A. You should stop making HSA contributions six months prior to filing for Social Security, if you are claiming benefits after age 65.

Can I invest HSA balances?

Funds in an HSA account can be invested, although the investment choices will vary depending on the HSA administrator. Some HSAs have limited options, such as a bank savings account. Others may offer a range of products, including mutual funds or exchange-traded funds. Note that many plans require a minimum balance—for instance, $1,000 or $2,000—before you can make investments.

As a practical matter, it’s a good idea to keep HSA funds needed to pay for two to three years of potential out-of-pocket healthcare expenses in cash or a cash investment, such as a bank deposit account—for instance, a checking or savings account—or a money market fund. Keeping a portion of your funds in a relatively stable, liquid investment can help you avoid being forced to sell riskier investments in a down market to fund an unexpected medical bill.

Also, you should never put off seeing a doctor because you don’t want to spend the funds in your HSA. Potential investment growth may be nice, but you won’t enjoy your earnings much if you’re sick.

What if I change jobs?

Your HSA is portable—if you change jobs, you can take it with you. Also, if you die with money still in your account, you can leave it to your spouse (who can use the money free of estate taxes, and tax-free for non-medical expenses) or other heirs (who would pay taxes on the money they inherit).

What is a qualified medical expense?

Doctor visits, diagnostic tests and laboratory fees, prescription medication, eye and dental exams, psychiatric care and many other types of expenses are considered qualified expenses. See IRS Publication 502 for a complete list of qualified expenses.

What is the “triple tax benefit” of an HSA?

As mentioned above, HSAs offer account holders a triple tax exemption:

  • no federal income taxes on contributions2
  • no federal taxes on investment earnings3
  • no taxes on withdrawals for qualified medical expenses

By comparison, 401(k) retirement plans offer just a double tax benefit—you pay no income taxes on contributions and no tax on investment earnings, but you do pay taxes on distributions in retirement. That triple exemption can make HSAs a uniquely powerful tool for building a nest egg for future health care expenses.

However, note that if you’re under 65 and you spend money from your HSA on non-qualified expenses, you’ll have to pay ordinary income tax on your withdrawals—plus a 20% penalty. After age 65, you’ll just have to pay income taxes.

HSA vs. FSA: What’s the difference?

Both an HSA and a health care flexible spending account (FSA) let you set aside pre-tax dollars to pay for future health care expenses. However, there are some key differences:

  • There are no special eligibility requirements for an FSA.
  • If you don’t use the total amount contributed to an FSA during a calendar year, you may lose it. Although your employer may allow you to carry over $500, or give you a grace period in which to spend unused funds, this isn’t required.
  • You can’t take an FSA with you if you change jobs, and any unused funds may have to be forfeited.

1 Paul Fronstin, “Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics, 2015: Estimates from the EBRI HSA Database,” Employee Benefit Research Institute, 11/29/2016.
2 HSA contributions are not deductible in several states, including California, Alabama and New Jersey. Check with your tax advisor for specific tax advice.
3 State taxes may vary.

Important Disclosures

Schwab Intelligent Portfolios® is made available through Charles Schwab and Co., Inc. (“Schwab”) a dually registered investment adviser and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are affiliates and subsidiaries of The Charles Schwab Corporation.

Please read the Schwab Intelligent Portfolios disclosure brochure for important information.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Charles Schwab & Co., Inc. does not sponsor or maintain Heath Saving Accounts.

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