One of the biggest reasons investors fail to achieve their financial goals is that they don’t have a plan. They have no idea from year to year if they are on track. This is why I came up with this concept of an investment timeline.
When it comes to investing, we all have a timeline. The timeline is made up of a series of years that represent our financial life. The majority of that timeline will be spent in the pursuit of saving and growing money. The last part of that timeline will be spent withdrawing and living off of that money.
Regardless of which part of that timeline you find yourself on, it is essential to understand if you are on track or not. The only way you can make good investment decisions is by having a reference point along the way. Consider it like a mileage marker that tells you how much further it is to your destination.
These mileage markers represent the total amount of dollars needed at that point on your timeline so that you know whether you are on the right path to achieve your financial goals. For example, let’s say that you need $400,000 by the end of this year to be on target for your goals. Right now, you have $395,000 with seven more months to go. You are probably going to hit that target. However, if you start to see that total go drastically down, then you know you are falling further away from your timeline, which would prompt you to take action.
So how do you put these mileage markers together?
(1) First, determine the age that you want to retire
This is the age that you want the retirement income to start.
(2) Second, determine in today’s dollars how much you will need at that age.
You can act as if that day is today. How much do you need for living expenses? How much for entertainment, traveling, etc.?
(3) Either find a program that will run these numbers for you or have a financial advisor run the numbers for you, showing you how much money you need to have accumulated at the end of each year on your timeline.
This provides you with your mileage markers. Now you have to make reasonable assumptions about the future. You have to assume that your money is going to grow a specific rate of return. You have to think that you are going to save a certain amount, too. Finally, you have to make assumptions about social security.
This system, or one like it, is critical regardless of where you are on your investment timeline. It works exceptionally well in the withdrawal years. It will tell you how much you have in addition to what you need. That creates options for you if you want to spend above and beyond the money that you are withdrawing. The bonus is that you can do it with confidence because you know how much you have and how much you need.
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