Time Horizon and Investing for Retirement

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Time Horizon and Investing for Retirement

You will not always want to use the same strategies for investing your retirement money wisely. You may want to change your investment strategy depending on whether you are still getting ready to retire or whether you are already retired.

The power of time

The longer your money grows, the more you will have for retirement. The money you have available for retirement will depend on how much you save, how long you let your savings grow, and at what rate your savings grow.

Deciding how much to save depends on the standard of living you’d like to obtain and how much you see yourself spending. Start with your monthly expenses now and ask yourself what would change in retirement. Plan for a few more years of retirement than you think you’ll need.

What does time horizon mean?

Your time horizon is the amount of time you have available to save toward your goal. All other factors being equal, longer time horizons enable us to assume more risk. The younger you are, the more aggressive you might be willing to be with your long-term investments. If you’re close to retiring, you might choose to make safer investments with lower returns, because the risk of losing your money in the short term is higher. But remember, your retirement can span twenty or more years, so you may want to maintain a portion of your investments in higher-risk securities for the potential higher return. Inflation can be significant over twenty years, and it will likely be necessary to keep a significant part of your investments in securities that can keep pace with or outpace inflation.

Your decision will ultimately depend on when you plan to retire and how long you expect your retirement to last. If you plan to go back to work after you retire, you might invest in safer, low-return investments after you retire but take more risks with your long-term investments in pre-retirement years.

Don’t forget price increases

You should also consider inflation. Prices generally rise over time. A dollar today will buy fewer things tomorrow. It will take more money in retirement than now to enjoy the same standard of living. Your investments should increase at a higher rate than inflation to stay ahead of rising costs.

Be flexible

Your investment time horizon will change as you approach retirement, and will continue to change when you’re in your retirement years. The longer your time horizon, the more you can take advantage of the high return potential of volatile investments. As your horizon shortens, however, you’ll need to pay more attention to protecting your capital and receiving income, while still defending yourself against inflation.