How To Invest Based On The Goal You’re Saving For
April 16, 2019You don’t have to listen long to a news report to figure out that investing is a major topic for many Americans. You’ll figure that out right about the time you also realize there is a lot of jargon involved, as well as complex and competing strategies.
You don’t have to understand everything you hear on the news to be a successful investor. What you do need for success is an idea of what your goals are. Before investing, you’ll want to answer the following questions:
- What do you want to use the money for?
- How much money do you need to meet your goal?
- When do you need it?
With the answer to those questions you can then start to make a plan. Don’t worry about making the PERFECT plan. Just make one that is reasonable and based on the information you have to work with. Despite what you may hear, investing success actually comes when you meet your own goals, not from making the absolute most amount of money you possibly could have made.
Investing success actually comes when you meet your own goals, not from making the absolute most amount of money you possibly could have made.
As a financial coach, I have the opportunity to work with a lot of people to design investment strategies to help them meet their goals. These goals often change as you move through life, so it is good to reassess every year, at least, to make sure your investment plan is still working for you.
How you invest will actually greatly depend on what you’re investing for – what’s your goal? Here are some examples:
Goal: I want to be ready to retire as soon as possible.
How much do you need?
When you get close to retirement, you can work on an actual retirement budget to help you decide how much money you need each year to live on, then use a retirement calculator like this one to help determine how much you need to have saved to generate that much income.
Earlier on, a good rule of thumb is to shoot for replacing about 80% of your current income which, depending on when you start saving, may involve putting aside somewhere between 15% and 20% of your income each year.
When do you need it?
Decide what retirement date you want to shoot for. Run some calculations with the retirement estimator to see how much you would need to save to retire at that time so you can be sure your date is somewhat realistic.
Investing strategy
Your investment strategy centers around two things: how long do you have until you need the money and how much risk can you stomach. This typically means that, when you’re young, if you can psychologically handle the fluctuations in the stock market, you’ll want to invest a lot of your account in various stock or equity funds.
As you get older or no longer feel comfortable taking on that much risk of fluctuations, you may gradually add more bonds and cash to the mix. If you’re not sure which investments to choose, you might want to check your plan for a Target Retirement Date option and choose a date close to when you plan to retire.
This risk questionnaire may help you decide where you fall in terms of how aggressive or conservative you want your investment mix to be.
Goal: I want to buy a house.
How much do you need?
Start by figuring out how much home you can afford. From there you can determine how much your closing costs will likely be and how much of a down payment you will need to bring to closing.
It is a good idea to save enough so that you don’t need to tap into your emergency savings at closing and avoid putting yourself in a sticky financial situation after you move into the home. Also, be sure to take into account any savings needed for repairs to the home and furnishings.
When do you need it?
Use the Saving for Goals calculator to run different scenarios on how much you’d have to save to meet your goal over different time frames, then come up with a plan that is realistic for you.
Investing strategy
If you’re looking at making the home purchase in the next 5 years, then you want to keep those saving safe from the ups and downs of the stock market. You don’t want to run into a scenario where you are ready to pull the money out and the stock market crashes before you get the chance. This usually means putting the money in a savings account, money market fund or some short term CD’s that will mature before you need the money.
Goal: I need to start saving for college.
How much do you need?
Using your own personal philosophy on paying for education and a cost of college calculator, you can come up with an estimate of how much you’ll need to save.
When do you need it?
This is going to be determined by the age of your child, or maybe your own plans for going to college.
Investing strategy
Consider saving in a 529 or other account that will allow you to invest your college savings in a manner appropriate for your goals. Typically, when your child is younger, you can afford to take a little more risk (have more in stocks or equities) with college savings and as your child approaches college age, you may want to dial the risk back considerably (have less in stocks and more in bonds and cash) so that you don’t have to worry about fluctuations in the stock market when you need to sell the investments and use the money.
Check your 529 plan for an age based option if you are unsure of which investments to choose.
Goal: I’m retiring soon.
How much do you need?
Now is a good time to create a detailed budget for living in retirement, then use the How Long Will it Last Calculator to get an idea of how long your retirement savings and other income will last depending on your spending needs.
When do you need it?
If retirement is imminent, you’ll need at least some of your savings now, but if you don’t feel comfortable with the results of the How Long Will it Last calculator, you may consider working longer, going part-time, or trying to cut back your spending. Also keep in mind that in most instances, you won’t need ALL of the money in your retirement plan right away.
Investing strategy
Most people plan to live a long time after they retire, so even though you want to protect some of your retirement savings from the stock market ups and downs, you also want your account value to continue growing so that you will be able to afford your style of living for many years to come.
If you put everything in cash at this point, your savings balance will stay the same, but the cost of everything you buy will continue to rise, so eventually, you may not be able to afford half of what you can afford today. See if one of these strategies for investing in retirement would work for you.
It can be as simple as setting aside in cash (or something fairly safe) the amount that you think you will need from your retirement account for the next 1 to 5 years and keeping the rest invested in a manner appropriate for your risk tolerance. Each year, you can reassess how much you will need for the next 5 years and make adjustments.
Alternatively, you may opt to hire a financial planner or build a portfolio to Generate Income in Retirement while taking on no more risk than you are comfortable with.
Of course, these are general guidelines to get you started, but if you have more detailed questions or think your situation might be different from the norm, consider reaching out to a Financial Coach if you have access to one through your Financial Wellness Benefit at work or contact your Employee Assistance Program to see if they can refer you to a financial professional who can help.