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Whether your dream is to retire in Florida or put your child through college, it helps to have an investment plan. The first step in developing a sound investment plan for your goals is to get specific in your goal setting. Answering these six questions will help you make decisions about your investments.
If one of your investment goals is a comfortable retirement, you'll need to know your income needs. A 2007 Retirement Confidence Survey by the Employee Benefit Research Institute states that only 43% of those surveyed had calculated how much they might need to invest for retirement. Without calculating your retirement income needs, you won't know whether you're on target to reach your investment goals. As you think about investing for retirement, remember that you could spend 20 years or more retired.
Be realistic about your investment goals and the time frame you have established to achieve them. Successful investing takes time, so don't get discouraged or give up on your goals if the market isn't performing the way you expected.
Let's say you have a child in kindergarten and have invested $2,000 each year for the past five years in a 529 Plan sponsored by your state. You're off to a good start. When estimating how much more you'll need for tuition, room and board and other college costs, factor in investment performance and inflation. In this example, you have 13 years left to invest. Assuming college costs rise an average of 5% a year, you'll need almost $141,000 when your child reaches age 18.2
The amount of time you have before you reach your investment goals will help you determine an appropriate mix of assets. Generally, you want more potential for investment growth and can accept more price volatility if you have longer-term goals. If you'll need money for your investment goals in five years or less, it's a good idea to select more conservative investments.
It's common to invest for more than one goal, with differing time horizons and risk tolerances depending on the goal. That means you may need a separate investment strategy and account for each one of your goals. For example, you may focus on capital preservation for a short-term goal, such as saving for a down payment on a house, while pursuing growth for a long-term investment goal, such as retirement.
As you begin retirement, your strategy may shift from growth to income, with a focus on staying ahead of inflation.
With each investment goal, consider your tolerance for market fluctuations. When you choose a variety of investment types that perform differently in certain market conditions, there's the potential that gains in one investment will offset losses in another. Diversifying your investments also can help reduce the overall risk to your portfolio but does not ensure against loss.
First consider how much you'll contribute annually toward each goal. Reviewing historical returns of money market, stock and bond investments may help you set realistic expectations for your investment portfolio, although past performance is not a guarantee of future results. You'll also want to factor in inflation, which has historically averaged 3%. Knowing how much you'll contribute each year then estimating the return on your investments should help you gauge whether your investment mix has the potential to meet your goals.
Remember, stock values and returns may be volatile and generally, as interest rates rise, bond prices fall.
Review your investment goals annually, noting your progress toward each one. If you can see you will have a shortfall or if you are not making progress toward a goal, you may need to reallocate assets into investments with a higher potential for growth or simply invest more.
1Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc.: 2007 Retirement Confidence Survey.
2Source: American Century Investments and actual data from "Table 5: Average Student Expenses, by College Board Region, 2007-08 (Enrollment-Weighted)." Trends in College Pricing 2007. Copyright 2007 by The College Board. Reproduced with permission. All rights reserved. www.collegeboard.org .
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This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.