Your Investing Goals

People often approach investing without setting clear objectives or goals, believing that simply saving enough money is an adequate investment strategy for retirement. Unfortunately, this approach may leave you relying on luck instead of a successful strategy to get where you want to go long-term.

Putting Your Investment Goals into Words

The first step in formulating an investment plan is to understand and then articulate your investment goals. Let’s break this down:

To understand your personal investing goals, you must take into account all the needs and preferences that may shape your financial life:

  • What kind of retirement lifestyle do you envision?
  • Do you plan to leave a financial legacy to last well beyond your retirement years?
  • What do you expect your retirement expenses to be?
  • What kind of investment growth will you need to achieve your long-term goals?
  • How will you pay for your retirement?
  • What asset types may be most suitable for generating the kind of income and growth you need?

To accomplish your financial goals, you must take into account expenses that may impact your overall growth and income needs.

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Start by Considering Your Non-Discretionary Expenses:

  • What are your living expenses?
  • How much debt are you carrying?
  • To what extent are your assets subject to income tax or capital gains taxes?
  • How much do you expect to pay in insurance and healthcare costs throughout your retirement?

Next, consider the potential costs of your discretionary activities:

  • Are you planning to travel?
  • Will you take up specific hobbies?
  • What kinds of luxury purchases might you make?
  • Do you plan to make charitable donations?

At a high level, goals-based investing is simple, but achieving the actual goals may not be.

Types of Investing Goals

  • Growth: The concept is simple: You have a given portfolio value now and you want it to grow higher over time. But how much growth and by when? That will determine the level of investment growth you’ll need to accomplish your objectives and meet your needs.
  • Cash flow: Your portfolio may need to generate sufficient cash flow to supplement or replace your income and fund your ongoing retirement expenses.
  • Combination of growth and cash flow: You need your portfolio to grow at a rate that allows it to provide a consistent cash flow. As with the pure growth goal, it’s critical to understand what potential returns you’ll need to accomplish this.
  • Maintain or improve lifestyle: You’ve worked hard for your retirement and may wish to maintain or enhance your current lifestyle in your retirement years. This means growing your purchasing power over time. Ultimately, this goal requires a growth strategy that must offset the detrimental effects of inflation.
  • Depletion, or spending every cent: Although spending every cent before you die isn’t a common goal among retirees, it does exist. But as you might guess, it is a risky proposition. There is no way to accurately predict your lifespan. And should you live longer than you expect, you could run out of money sooner than you had planned.
  • Capital preservation: This refers to preserving the nominal (not adjusted for inflation) value of your assets. This goal may be more appropriate for investors with shorter-term cash-flow needs, but not for investors with longer time horizons because capital preservation over a long period can mean diminishing purchasing power.
  • Capital preservation and growth: These two goals are inherently at odds. They cannot be pursued at the same time, as terrific as that may sound. In our view, anyone who tells you otherwise should be questioned. Growth cannot be achieved without putting investment capital at risk.

Inflation and Your Investment Goals

Inflation is an insidious factor that any long-term investor needs to take into account. Put simply, inflation is the general rise in prices for goods and services over time. All else equal, inflation reduces the purchasing power of money, requiring investors to grow their wealth by some minimum amount to keep pace with inflation’s deteriorating effects.

Consider this scenario: Inflation has risen by an average of 2.9% per year since 1925*. If you currently require $50,000 to cover your annual living expenses and inflation continues to rise at the same rate, your expenses will grow to nearly $90,000 in 20 years, and $120,000 in 30 years.

In order to adequately account for inflation in your investment plan, you need to first define how much you want to have at the end of your time horizon. Then you should determine the retirement lifestyle you desire and any ongoing expenses. With all of these components in mind, you can then determine the growth you’ll need to reach your goals and support your lifestyle while keeping pace with inflation.

When formulating your investment goals, make sure your inflation-adjusted return expectations exceed your projected cash flow needs, and that both figures take into account the effects of inflation.

Don’t Risk Running Out of Money in Retirement

Finally, consider the possibility you could outlive your assets. Running out of money during retirement is one of the most painful experiences retirees can face. So, when crafting your investment goals, don’t underestimate how long you may need your assets to provide for you and your family.

Your investment time horizon, cash flow needs and investment objectives impact your unique asset allocation needs. These needs differ from one person to another. If you have a shorter time horizon, you generally would want to invest more in less volatile asset classes such as fixed income and cash. If your investment time horizon is longer, you may want to invest in more volatile asset classes such as stocks with higher potential returns.

Achieving your financial goals involves much more than having enough in savings. Planning for retirement can be complex, which is why when you make decisions to fund your retirement account, you may want to rely on the services of a financial adviser.



Source: Global Financial Data, as of 5/19/2022. United States Consumer Price Index, annually from 12/31/1925 to 12/31/2021.

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