| |
This information can help you:
Whether it's a home, a child's education, your own retirement, or another aspiration that requires personal savings, you've identified a life goal. You already know that reaching your life goal requires a money goal, and reaching the money goal requires more than just putting the money aside. You'll need to invest it, putting it to work so it earns and grows over time. How much it has to grow - and how soon - is your first point of focus.
Use the Calvert Savings Calculator to set your money goals
Using the Calvert Savings Calculator, you can enter your starting amount and years to goal and then experiment with various additional-contribution amounts and possible rates of investment return. Using the calculator can help you set specific savings goals and get a sense for how different possible rates of return could help you accumulate the assets you'll need to make your down payment.
Once you've broadened your life goal to include a specific money goal, you're ready for the next step - making decisions about how to invest.
Invest based on time and risk tolerance
Two types of risk are particularly important to investors:
- Market risk, the chance that your investments will lose value because of the ups and downs of the stock or bond market, and
- Inflation risk, the chance that your investments won't stay ahead of inflation.
Generally, the more time you have until your life goal, the more market risk you can take on, and the less inflation risk. The less time you have, the less market risk you can take on, and the more inflation risk.
To see how time has historically moderated market risk, look at the illustration below. In the short term, stock values have been very volatile. But over time, they have tended to moderate and to net out providing a long-term average annual return of 11% over the past 50 years, according to Ibbotson Associates. (And remember: money can lose value over time because of inflation, so there is further motivation to invest in stock funds for the long haul.)
This chart illustrates stock market gains versus losses for one-, five- and 15-year periods from 1926-2002. Of the 77 one-year periods, 23 resulted in a loss. However, as the holding period increases to five years, only eight of the 73 overlapping five-year periods resulted in a loss. Notably, all 63 overlapping 15-year periods show positive returns.
Past performance is no guarantee of future returns. This chart is for illustrative purposes only and is not indicative of any investment, including any Calvert fund. Stocks are represented by the S&P 500, which is an unmanaged group of securities and is considered to be representative of the US stock market in general. An investment cannot be made directly in an index. The performance of an index is not reduced by the effects of sales charges or management expenses.
Fortunately, there are strategies for moderating both market and inflation risk:
- Investments that expose your savings to less market risk are income and cash investments, like bond and money market funds. Their rates of return are generally lower than those of stocks and stock funds, of course. And, keep in mind that bond funds are not "stable value" investments, and their prices do fluctuate, generally declining as interest rates rise and rising as interest rates decline.
- Investments that expose your savings to less inflation risk are growth investments, like stock funds. Their rates of return are generally higher than those of bonds and bond funds. Of course, stock funds, like the stocks they invest in, fluctuate in value with the ups and downs of the market.
Certainly, all investments involve some degree of risk, and it's important to understand the risks associated with any investment you choose before you invest. Your financial advisor can help with this process.
Set goals for significant life events
Take a look at the "big picture" of your life and list what you expect to occur during each coming decade. Or, put specific goals on paper and make some assessments of their accompanying money goals.
Here are a few common goals and events, along with considerations that can affect money goals:
First job
- If you're entering the workforce with a significant amount of debt, make a plan to pay it off.
- Make a budget and stick to it (one that includes paying off debt if you have it). Once a year, adjust your budget to reflect the way you really live. A budget's no use to you if it's not realistic.
- From the beginning, realize how important it is to have an "emergency" fund. Many financial planners recommend keeping a fund equal to three months' salary.
- You've heard it before: Pay Yourself First! Paying off debt is one way of paying yourself. A second: if your employer offers a qualified savings plan (401(k), 403(b), etc.), begin participating as soon as you're eligible. Contribute at least the minimum required to receive any employer match that's offered. Your ultimate goal, of course, should be to contribute the maximum allowable.
- If your employer doesn't offer a savings plan, start saving in an individual retirement account (IRA). Again, contribute the maximum allowable if possible.
- Meet with your financial advisor!
Marriage or partnership
- Look at your individual assets and debts. Decide whether to combine them or keep them separate.
- Make your spouse or partner the beneficiary of savings, investments, insurance, and other accounts.
- Consider the longer-term goals you've both had and decide how they can be meshed or work together.
- Decide whether you'll retain your own financial advisor, retain your spouse or partner's advisor, or find a new advisor. If you decide to interview potential new advisors, use the Calvert AdvisorFinderTM to find advisors in your area.
Adding to your family
- Revise your budget to reflect your family addition.
- Begin saving for your child's education in a college savings plan.
- Add your child as a secondary beneficiary of savings, investments, insurance, and other accounts.
- Talk with your financial advisor about whether establishing a revocable living trust makes sense given your financial situation.
- Meet with your financial advisor!
Changing your job
- Meet with your financial advisor before you leave your current job.
- If you have participated in your employer's qualified savings plan, learn what options the plan offers for your assets in the plan.
- Consider rolling over plan assets into a rollover IRA to maintain maximum control and investment options.
Buying a home
Plan ahead. For example, if you hope to purchase your first home five years from now, you may have a rough idea of how much you'll be willing to spend and how much cash you'll need for the down payment. Use the Calvert Savings Calculator to see how much you might need to save each month and how much your investment might grow from investment returns, interest, and/or dividends.
Losing a spouse or partner
- Whether through divorce or death, losing a spouse or partner can involve many business and financial considerations. Because these considerations occur at time when you may be emotionally stretched, be sure to consult with your financial and legal advisors for help.
- Estate, inheritance, beneficiary, and other laws and policies can be very complex. Don't make decisions too quickly or without adequate professional advice.
- Be sure to change your beneficiary designations on your savings, retirement, IRA, and other accounts. This can be particularly important in the case of divorce to ensure the appropriate transfer of assets.
Retiring
Review our Retirement Planning site for a thorough discussion of issues and decisions related to retirement.
|
