Time Horizons and Retirement Planning

A time horizon is the number of weeks, months, years or decades you require to reach a goal. That goal may be financial in nature – such as how long it will take you to save enough money to buy a car. Or you might have a time horizon for a lifestyle decision – like how many years you need to complete a degree.

When it comes to retirement planning, your time horizons are often both lifestyle- and investment-oriented. Time horizons vary for each individual person, goal and investment. They can change over time as your needs and plans change but generally can be sorted by length into three major types.

When it comes to planning your retirement, the factors that affect your time horizon are unique to your situation. Your age, retirement goals, income and health status all come into play. As these factors interact, they can sometimes cause you to shift your time horizons.

Having a time horizon is important because it’s the first basic step in retirement planning. In order to make a successful plan, you need a starting point. Namely, when do you want to retire? In three years? 10 years? 30? It‘s important to have a solid sense of when you intend to stop working. The earlier you know the better, because it allows you to create the foundations for a financially comfortable retirement.

Time horizons are significant because they help you make informed financial decisions as you navigate retirement. Your retirement income planning, investment decisions and overall strategy will depend on your time horizon.

Once you know when you want to retire, you’ll know what your time horizon is. The years between your current age and your desired retirement age will determine the length of your horizon. The further your retirement time horizon is, the more time you have to save for it.

RetireGuide’s retirement calculator can help you check the health of your retirement savings to see if you’re on the right track or if you need to make adjustments to your savings strategy.

Generally speaking, the longer your investment time horizon, the more time you have to generate growth and compound interest. You can contribute smaller amounts each month so your daily life is not impacted.

Long-term time horizons typically lessen your exposure to risk. The longer you have to invest, the easier it is for your money to overcome short-term drops in value. You can invest in products with higher risk, like stocks and other equities, and take advantage of the higher returns they can bring.

Short-term time horizons are more susceptible to market volatility, thus many short-term investments focus on safer products, like high-yield savings accounts or certificates of deposit (CDs). With this method, your money has a chance to earn a little extra while still being accessible – without being subject to a sudden plunge in the market.

When investing with an intermediate-term time horizon, you can do a little of both. Since you don’t need your money immediately, you can choose to put some of it in high-risk investment products like stocks and grow your retirement savings with higher returns. At the same time, you can also invest in more risk-averse products such as bonds, and protect your principal while still having access to it.

It’s smart to use all three timelines in your retirement investment strategy. That way, if you have a sudden change in circumstance – for example, unexpected home repairs or a health incident – you can shift savings from a long- or intermediate-term time horizon to your short-term savings for immediate access.

Making your retirement plan is only the first step in the ongoing process of reviewing and adjusting your investment strategies. Some of those adjustments will be determined by your time horizons.

For instance, say that in your 30s, you’re making regular contributions to your 401 (k) or IRA. Then, in your 50s, as your earning power increases and your timeline moves closer, you may increase the amount you invest every month. Then, as you near your desired retirement age, you likely choose to switch your contributions to low-risk products instead of into your IRA, to build a cushion for immediate use.

Diversifying your portfolio goes hand-in-hand with time horizons. With a long-term time horizon, you might weigh your investments heavily with equities, since the distant outlook means you can balance any risk against the potential for growth. In the intermediate term, a more evenly balanced approach between stocks and bonds might be appropriate. And in the short term, the balance tips in the other direction, leaning heavily on conservative investments like bonds, CDs, money markets and high-interest savings accounts.

As your timeline changes, so should the proportion of your portfolio. The farther away you are from retirement, the more risk you can accept. The closer you come to your retired retirement age, the more conservative your portfolio should be.

Editor Malori Malone contributed to this article.