I. Defining Your Time Frame

 Watch This Video on Goals Based Savings & Investing

Key take-aways:

  1. For any financial goal, your time frame is now until you need the money.
  2. Determining your time frame for each goal is critical in investing, as different time frames require different approaches, particularly in asset allocation (mix of stocks, bonds, cash).
  3. Longer time frames allow for investing in assets with higher expected returns, so you want to take advantage of time frame to maximize potential returns.
  4. At any one time, you will likely have several goals with different time frames, so it helps to segment accounts for each goal.

For any financial objective, your time frame is now until the point you need the money.  If you are 25 and want to buy a house at 32, you have a 7-year horizon to build up the down payment.  Many goals have a two-stage time frame.  If you want to pay for your child’s college and she is four, you have about 14 years until she starts, followed by four years of paying the tuition bills.

The ultimate two-stage horizon is retirement, which is the most important financial planning goal for most people and a chief focus of this site.  If you are 32 now and hope to retire when you are 70, you have 38 years to save and invest, followed by perhaps 13-16 years of drawing on those funds during retirement. If you hope to retire when you are 62, you have 30 years to save and invest, followed by 19-23 years in retirement. (1)

Simple enough.  You didn’t need me to do that math.  The tricky part is most of us have brains wired to the here and now—”the news on CNBC is bad, what should I do? i’m hungry, where should I go for lunch?”  In today’s world, instant communications and 24-hour news exacerbate our near-sighted, anxious nature.

With this in mind, for any financial goal, there are three planning and implementation hurdles you have to clear:

  1. Estimate how much you need to save over each year between now and your goal date.
  2. Formulate a plan to invest these savings, so that the funds work as hard as they can within a reasonable risk framework.
  3. Stick with the plan.

Savings Advice and Tools

But before I goBoy looking at a stack of coins there, here is a quick word on the first step, the savings aspect.  It’s a big first hurdle.  It requires taking a couple hours now to get organized, so you are in good shape for an event years or even decades in the future. It also entails steadily setting aside cash that you’d like to spend now.

To start, I can do no better than offer up the Nike slogan: Just Do It!  A little effort now means peace of mind and a much better lifestyle later on.  As encouragement, you should also know that if you start early enough, even modest savings can grow to significant dollars over time, which we illustrate in the next section, The Power of Compounding.

You will find some Planning Tools here on this site.  And with a quick web search you can find tools to help you figure out how much you need to save for retirement and interim goals.  For example, there are calculators that help you estimate how much you could spend in retirement.  This determines how big your accounts need to be at retirement.  Finally, this factors into when you could or should retire and how much you may need to save each year from now until then.  Remember these are only estimates.  Most critically, the savings required depends on how you invest these funds—expected returns at the outset and how well you execute your plan.  The sections that follow offer perspectives to help you formulate and stick to a plan that maximizes your chance for success.

Three buckets with money, different sizes

One final practical suggestion on the savings front.  At any one time, you will likely have several financial goals, each with its own time frame.  For example, as above, saving to buy a home, saving for children’s college and saving for retirement.  Most of us have a natural tendency to think of each goal as having its own bucket of funds. I advocate embracing rather than fighting such “mental accounting.”  I think this natural disposition is useful and valid—because goals vary in their time frame and importance, they require different investment approaches as well.  Creating a separate bucket for each goal can be done conceptually or by in fact creating a separate account for each goal.

This is a practical way to allow you to tailor your investments for each goal and to see very clearly how you are progressing over time toward each goal.

(1) Based on current actuarial assumptions, men reaching age 62 may expect to live another 19.1 years on average, while men reaching age 70 may expect to live another 13.3 years.  For women reaching ages 62 and 70, they can expect to live another 22.5 years and 16.4 years on average, respectively.  Under current rules for Social Security, full retirement age is 65 to 67, depending on the year in which you were born.  You can begin to collect partial benefits at age 62 and enhanced benefits if you defer to age 70.  The average life expectancy in the United States is about 76 for men and 81 for women, according to the most recent (2013) study by the World Health Organization.