CLICK FOR FREE CATALOG OF AUDIO COURSES
Welcome to Get Smart about Investing. Trying to quantify your investment goals is critical. How much money do you think it will take to retire? How much money do you think you’ll need for your child’s college education? Many investors jump into choosing mutual funds for their 401(k) or open a 529 plan for their child’s college education without any sense of how much they’re trying to accumulate. Quantifying your goals involves two important components:
1. You need to estimate how much money you’re trying to accumulate.
2. You need an approximate time horizon. In other words, how much time do you
need to reach the particular goal.
The reason I use the terms “estimated dollar amount” or “approximate time horizon,” is that so much can happen between now and then that all of your planning has to be flexible. There is no right answer when it comes to investment planning. If you’re not sure whether you’re going to retire at 60 or 65, let’s make some projections based on both ages so you have a range to consider. If you’re not sure whether your investments will grow at 5 or 10 percent, again, let’s look at both and see how they affect results. What I know for sure is that most of the estimates you and I will make will be wrong at least to some degree - but that’s okay. Investment planning is not an exact science. Situations and priorities may change over time and you have to be willing to be flexible in your planning along the way.
The goal of planning is to get you in the right ballpark, not to reach an exact figure that doesn’t exist in the real world. I’m not worried about the person that needed to save $350,000 for retirement and ended up with $325,000. Their life will basically be the same either way. I am concerned about the person that needed $600,000 to retire and only saved $200,000. Their lives will be very different. I’ve been on the other side of the desk when a 67-year old man walks in and says he wants to do retirement planning, but only has $65,000 saved up. It’s a situation you don’t want to be in.
Let me give you an example of what happens all too often with investment planning. An investor starts to plan for retirement or college and has a tough time figuring out how much money they would need. Not being sure is perfectly normal, but unfortunately what usually happens is the individual gets frustrated and says, “forget this, I’ll do it another time,” and ends up doing nothing. That’s what we’re trying to avoid.
Quantifying goals can also separate realistic goals from fantasy. Now if I asked you, “when do you want to retire?” what’s the first thing that comes to mind? When I ask people that question, they usually respond with, “tomorrow” or “as soon as possible.” It’s important to realize that it’s very difficult to decide how much risk you need to take or what investments are appropriate for your situation without having a sense of how much you’re trying to accumulate and by when. With each of the important goals that you identified in step one, take your best guess. How much money do you think you’ll need? How much do you need for retirement? How much do you want to save for your college education? You get the idea.
I’m Greg McGraime and Now You Know!