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How to Set Your Investment Goals

By Fisher Investments Editorial Staff

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:

  • What kind of retirement lifestyle do you envision?
  • Do you plan to leave multigenerational wealth to last well beyond your retirement years?
  • What do you expect your expenses to be in retirement expenses to be?
  • What kind of growth is necessary for you 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 you need?

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:

  • What is the cost of your living expenses?
  • How much debt might you be 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?
  • Are you looking forward to taking up specific hobbies?
  • What kinds of luxury purchases might you make?
  • Do you wish to leave a legacy to your children, grandchildren or community?

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.   

Types of Investing Goals

  • Growth: The concept seems simple. You have something now. Over time, it grows into something more. But how much investment growth is appropriate and realistic to accomplish your objectives and meet your needs?
  • Cash flow: Your portfolio likely must sustain the ability to generate sufficient cash flow throughout your retirement.
  • Combination of growth and cash flow: You would like your portfolio to have the necessary growth to provide consistent cash flow. As with the pure growth goal, it’s critical to understand what potential returns to expect.
  • Capital preservation: This aspect of goal-based investing refers to preserving the nominal value of your assets. Nominal values aren’t inflation-adjusted, and investor confusion is common on this topic. This goal may be more appropriate for investors with shorter-term cash-flow needs, but not for investors with longer time horizons, as capital preservation over a long period can mean watching your purchasing power diminish.  
  • 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.
  • Maintain or improve lifestyle: You have 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 erosive 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.

Defining Investing Goals 

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.

Our Advisers Can Help

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%).

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.