Some financial goals are more quickly achievable than others. Luckily, you can choose from a wide range of investment options that can accommodate short-term and long-term growth.
Depending on your age and your progress toward your goal, your investment’s time horizon or timeline can range from a few months to decades.
By building your financial literacy and considering your time horizon when making decisions about your investments, you can be better equipped to meet different financial objectives throughout your lifetime.
Why Is Time Horizon Important for Financial Planning?
Time horizon is important because it informs how you need to be saving or investing to reach a certain goal.
A strategic financial plan will include long- and short-term goals. Your strategy for saving for retirement will be different from a strategy for buying a new sailboat in time for summer vacation.
There are three asset categories you can include in your plan: stocks, bonds and cash. Your portfolio can have a combination of these assets, and a financial advisor can provide recommendations on the allocation that best aligns with your objective.
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- Stocks
- Among the three categories, stocks have the highest risk and highest return potential.
- Bonds
- Bonds have less market risk than stocks, but they offer lower, modest growth.
- Cash
- Cash has the lowest risk and the lowest potential returns compared with stocks and bonds. The cash category also includes cash equivalents, such as certificates of deposit and money market funds.
Investment Asset Categories
“The process of determining which mix of assets to hold in your portfolio is a very personal one,” according to the U.S. Securities and Exchange Commission. “The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.”
Time horizon is strongly linked with your risk tolerance — which can range from aggressive to conservative — based on how much money you need, and how quickly you need it.
With a longer time horizon, investors are often more aggressive, leaning toward high-risk, high-reward investments. This is because they have more time to recover from any market downturns.
On the other hand, with a short-term time horizon, investors are typically more conservative. Stability is the goal with these low-risk instruments because they may not have time to recover from losses resulting from a volatile market.
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Evaluating the Time Horizon for Specific Goals
Understanding your time horizon can help you achieve your financial goals and maximize your returns along the way. The time horizon for a specific goal will fall into one of three categories.
Time Horizon Categories
- Short-term: less than three years
- Mid-term: three to 10 years
- Long-term: more than 10 years
Consider a 25-year-old male who has recently begun his career. He is saving money to buy a house when he turns 27 years old. His time horizon in this case would span two years, which is considered a short-term goal.
He also plans to pay off his student loans 10 years later, on his 37th birthday. This is a mid-term objective, as accomplishing this may take up to ten years of saving.
At the end of his career, at the age of 66, he would like to retire comfortably — a long-term goal with a time horizon of many decades.
Throughout his lifetime, his goals and priorities can change. After he reaches age 50, he may decide he would like to retire early, at the age of 60. He would need to update his strategy to account for a shorter time horizon.
FINRA suggests staying flexible and being prepared to “adapt your timetable to your changing needs and priorities.”
How to Determine Your Time Horizon for Retirement
Time horizon is significant at every stage of the retirement planning process.
To determine your own time horizon for retirement, ask yourself two key questions:
- How old am I now?
- How old do I want to be when I retire?
Qualified retirement plans, pensions and annuities are designed for long-term savings. The earlier these assets are established, the longer their time horizon and growth potential.
In most cases, the longer the time horizon for retirement savings, the less money you need to save and the more money you will have when you retire.
You can reallocate your assets as time progresses — or as the time horizon shortens.
For instance, when you are 20 years away from retiring, you may have a mix of 75 percent stocks and 25 percent bonds. Fifteen years later, when your time horizon has shrunk to five, you can adjust your portfolio to 50 percent stocks and 50 percent bonds.
You’ll be relying on your retirement income to cover living expenses for years, or even decades, after you retire, so your life expectancy is another important factor for your savings plan and objectives.
A financial expert can help you set reasonable timeframes for your goals and navigate your options.
