Investors often invest without setting clear objectives, believing that simply saving enough money is an adequate investment strategy for retirement. Without clearly defined goals, however, you may find yourself relying on luck instead of a successful strategy to get where you want to go.
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:
To accomplish your financial goals, you must take into account the non-discretionary and discretionary expenses that may impact your overall growth and income needs.
Start by considering your non-discretionary expenses:
Next, consider the potential costs of your discretionary activities:
At a high level, goals-based investing should be simple, even though achieving the actual goals may not be. Start by asking yourself what you want to achieve financially.
First, you should decide how much growth you need to support the retirement lifestyle you desire. That means you need to define how much you want to have at the end of your time horizon. You should also define your purchasing power to support your lifestyle and that of any dependents.
One critical point that can’t be overstated is to never underestimate the insidious impact of inflation, a force that can seriously erode your purchasing power over time. Consider this scenario: Inflation has risen by an average of 3% 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 $90,000 in 20 years, and $120,000 in 30 years.
Therefore, when determining your investment goals, make sure your real return expectations exceed your projected cash flow needs, and that both figures take into account the effects of inflation.
And finally, consider the possibility you could outlive your assets. Running out of money during retirement is one of the most unpleasant risks and 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. You may want to consider entrusting a financial adviser to manage a portfolio for your spouse.
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.
When it comes to achieving your financial goals after you retire, it involves much more than having enough in savings. Planning for retirement involves a complex process with various moving parts, which is why when you make decisions to fund your retirement account, you may want to rely on the services of a financial adviser.
At Fisher Investments, we can help you define your investing goals. Call us at 1 (888) 823-9566 and speak with one of our financial advisers who can help you define your investing goals and help set up a plan to meet those goals.
*Source: FactSet, Inc.; as of 12/31/2015. Based on US BLS Consumer Price Index from 1925 to 2015 (2.98%).