What is Your Time Horizon?

What Is Your Time Horizon?

Different goals have different time horizons. Some are short term—such as establishing an emergency fund—and some are long term, like retirement. Tackling all your savings goals at once is unrealistic, so you should prioritize.

The most immediate savings goal is your emergency fund.

  • Experts recommend that you have an emergency fund sufficient to cover six months living expenses.
  • Assets in the emergency fund should be very liquid such as cash in a savings account or in a money market fund.
  • You may need a bigger emergency fund in some circumstances:
    • If you may face hurdles when looking for a new job, such as geographic restrictions or the need for flexibility in terms of travel or work hours.
    • If you have health issues or a dependent with special needs.
  • If you dip into your emergency fund, replenish it as soon as possible.

Saving enough for retirement is the biggest concern for many of us.

  • You will likely need multiple sources of savings to fund your retirement:
    • The primary sources of retirement funds come from 401(k)s and 403(b)s, and from IRAs.
    • Social Security is also a source of retirement funds.
      • You can go to ssa.gov/estimator to estimate your future Social Security benefits.
      • Social Security payments will be greater if you delay collecting until age 70, because the Social Security Administration bases its computations on old mortality tables that project shorter life expectancies.
    • Another source of retirement funds is personal savings.
  • Retirement calculators and savings guidelines can provide you with an estimate of what you need to save.
    • Retirement calculators:
      • For income needs during retirement, factor in 70–85 percent of your preretirement salary. It is challenging to estimate your future salary, so try different scenarios.
      • Some of your expenses in retirement will go down, such as commuting, dry cleaning, and eating lunches out.
      • You will not be making retirement plan contributions.
      • Some expenses, like leisure travel and health care, will likely go up.
    • Retirement guidelines:
      • A common guideline is to build a retirement fund that is equal to a multiple of your preretirement income.
        • Experts suggest striving for a multiple from eight to fifteen times your salary at age 65.
        • If you plan to retire before age 65, or if you have a high income and a high standard of living, aim for the upper end of the range.
      • You need to chart progress over time.
        • Compare your current retirement savings balance to your current salary to assess your progress.
        • Computing the multiple based on your current salary will help you determine whether or not you need to ramp up savings.
      • Unless you are facing an emergency, do not borrow from your retirement account.
        • If you do so, you will miss the growth opportunity for the money that you borrowed.
        • Paying yourself back could take longer than expected.
        • You will incur fees.

Your intermediate savings goals depend on lifestyle choices, and they should come after establishing an emergency fund and making regular contributions toward your retirement savings.

  • For intermediate-term needs, focus on one need or goal at a time.
  • To work toward to that goal, some investors save a fixed percentage of their income, such as 10 percent or 15 percent.
    • This strategy is appealing because it is easy to stick with and simple to follow.
    • A fixed percentage gives you the flexibility to save more if your income goes up and save less in a down year.

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