Set Specific Goals in Six Easy Steps
American Century Investments
Whether your dream is to retire in Florida or put your child through
college, it helps to have a plan. The first step in developing a sound
investment plan for your goals is to get specific. Answering these six
questions will help you make decisions about your investments.
How much will I need?
If one of your goals is a comfortable retirement, you’ll need to know your
income needs. A 2006 Retirement Confidence Survey by the Employee Benefit
Research Institute states that only 42% of those surveyed had calculated how
much they might need to invest for retirement.1 Without calculating your
retirement income needs, you won’t know whether you’re on target to reach
your goal. As you think about investing for retirement, remember that you
could spend 20 years or more retired.
Be realistic about your 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.
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How much have I saved?
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 about $127,000 when
your child reaches age 18.2
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How long until I reach my goal?
The amount of time you have before you reach your goal 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 a
longer-term goal. If you’ll need money for your goal in five years or less,
it’s a good idea to select more conservative investments.
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Which investment mix will help me reach each goal?
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. 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 goal, such as
retirement.
Or as you begin retirement, your strategy may shift from growth to income,
with a focus on staying ahead of inflation.
With each 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.
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Am I investing enough to reach my goal?
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 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.
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Am I on track to reach my goal?
Review your 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.
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Notes:
1Source: Employee Benefit Research Institute and Mathew Greenwald &
Associates, Inc.: 2006 Retirement Confidence Survey.
2Source: American Century and actual data from "Table 5: Average Student
Expenses, by College Board Region, 2005-06 (Enrollment-Weighted)." Copyright
2005 by College Entrance Examination Board. Reproduced with permission. All
rights reserved. www.collegeboard.com.
This information is for educational purposes only and is not intended as
investment or tax advice.
To learn more about American
Century Investments or other mutual fund companies, visit Fund
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