Investing for Financial Goals with Different Time Horizons

When it comes to long-term financial goals, most people learn the importance of investing early. With this extended view in place for perhaps the biggest financial event of a person's life—retirement—it can be difficult to determine the appropriate strategy for short or intermediate time horizons.

Here are tips on setting financial goals with differing time horizons so you can create a solid plan to achieve them all.

Setting financial goals

As with any other type of goal setting, start with the end in mind. For goals with a shorter time horizon—like saving for a big-ticket purchase—getting to a goal number can be relatively easy. From here, work backward to determine how much you should invest each month into which mix of securities to generate your targeted outcome.

For goals with a longer time horizon, like retirement, determine your ideal number by figuring out what you want your post-work life to look like. Be as specific as possible. Traveling the world and focusing on a hobby require two distinct levels of funds.

Getting to your retirement number may also involve planning for long-term care and relocating to a smaller home or senior facility. Although there are many more unknowns for a long-term financial event, you can use a retirement calculator or talk with a trusted financial professional to determine how much you should aim for, then work backward from this number.

It's important to remember that no matter what you do, there's no guarantee that any investment strategy will succeed. All investing involves risk, including the potential loss of principal.

Investing for shorter time horizon goals

It's fairly easy to calculate costs for short-term financial goals that are between 1 and 5 years away, largely because these goals typically involve large purchases like a new home or car.

However, it's important to plan your investment budget wisely for these types of goals because of the shorter timeframe. Instead of directing these dollars into growth investments, consider less volatile, highly liquid investments with some growth potential. These types of investments will offer quick, easy access to your money when you need it.

Investing for intermediate time horizon goals

Intermediate goals, which can range from 6 to 15 years, blend a more readily available financial estimate with some of the less-tangible aspects of long-term goals. In many cases, you can make an educated estimate of how much this milestone will cost, but some factors like inflation and life changes aren't as easy to predict with an intermediate time horizon.

One of the most common goals in this timeframe is saving for education. While tuition and associated costs are typically posted for the current year and next few years for your target institution, education costs tend to rise faster than the rate of inflation—making the final figure less concrete.

As with retirement savings, time and compounding interest will be on your side the sooner you get started. Because you have a longer time horizon, you may have a higher risk tolerance and can allocate more dollars to investments with a higher growth potential in your portfolio.

Here are additional factors to consider when laying out intermediate-term education goals.

• What if the goal you were saving for ends up not happening, like saving for a child's college education only to have them choose something else? What's the backup plan for these funds?
• What if the plan varies drastically from what you anticipated, like if you saved for your child to go to a public state college and they were accepted into their dream Ivy League school?
• What other resources can you lean on to help you achieve these intermediate horizon goals? If it relates to education, how can you leverage financial aid or scholarships?
• How will you balance your goal of setting your child up for success while staying on track with your own retirement goals?

Investing for longer time horizon goals

Long-term investing goals—those that are 15 years or more away—have the benefit of compounding interest over several years, especially for retirement savings. These types of goals also come with ambiguous elements that make determining a goal number a bit more challenging.

With any financial goal that has a longer time horizon, the key is to start early and let time do most of the work to help your money grow. For many investors, this means starting out with your company's 401(k) plan when you first enter the workforce in your early twenties and contributing a small amount each pay period and consistently over time. Those who wait to start investing for retirement generally need to set aside larger amounts later in life to make up for the time gap.

Here are other things to keep in mind as you plan your retirement investment strategy.

• Plan to live for a long time. The average life expectancy of US adults is 79 years old, which means funding retirement for at least 14 years if you plan on retiring at 65.
• Invest based on your time horizon. Those who are further away from retirement may see a higher potential for long-term returns by having a larger portion of investments in equities. However, those who are closer to retirement should hold a greater portion of their retirement savings in less-volatile investments.
• Consider the impact of inflation on your retirement savings. Assuming that the cost of living will only continue to increase can help keep your future retirement income in line with future spending.

The bottom line

Setting financial goals for yourself doesn't have to feel like guesswork. As a financial goal starts to form in your mind, take time to write it down on paper and do the calculations. Once you understand the time horizon and how much you need to save, you can select the appropriate type of account and investment mix.