Thursday, 29 May 2008

Setting Investment Objectives

First things first, what are your investing goals? What will you want to spend on in future and when? The big chunks of money matter most, naturally. Think of big life events which have financial implications.

1) Retirement - retirement is an inevitable voluntary or involuntary point when investment build-up turns to withdrawal (an exception perhaps is the richest man in the world, investor Warren Buffett, going strong at age 78). To figure out the investment nest egg – your objective - estimate your retirement spending, subtract pension income sources, then obtain the lump sum objective by multiplying the missing income by 25, which assumes a conservative 4% withdrawal rate that should avoid ever running out of money. (e.g. in the simplified chart below, the green amounts are what might be required for a current $75,000 salary). The estimation process can get more sophisticated, and a future post will get into more detail. Given the large lump sum that most people would need, this is, or should be, investing priority one.

InvestorEd Retirement page on How Much? - unbiased advice, includes downloadable budget spreadsheet
FiscalAgents Tools - have fun with four different retirement calculators
The New Retirement Book by Sherry Cooper - especially chapter 9, How Much is Enough? - summary at BMOIL, review, buy

2) Education - an undergrad university program costs over $6200 a year on average according to a Stats Can press release. Add in books, possibly residence and the total can climb to $15,000 p.a., or $60k for the degree. The wildcard is how much you plan to have the kids finance themselves through summer or part-time jobs, or loans.

3) House - the investment target usually will take the form of a down payment, no less than 5%, better 10% or more (see The ABCs of Mortgages at the Financial Consumer Agency of Canada). The amount you will need (house price booms excepted) and when you will need it is under your control.

4) Inheritance/Legacy/Charity - as people get older, consideration often turns to what they will leave behind. Our friend Mr. Buffett decided not to die first and announced a few years ago that he was donating $31 billion! to charity. Giving is perhaps the easiest investing goal to handle since the amount - whatever is left over - and the timing - whenever you kick the bucket - can be completely passive and flexible.

5) Vehicle, Sabbatical, Wedding, Funeral or other significant future expenditure. Smaller and more controllable amounts but they can enter the mix.

What does the above imply for the Investor?

You should consider:

  • a mix of types of investments with faster growth over the long haul, like equities and those with stability, like bonds or cash, for shorter term objectives;

  • use of retirement accounts, like RRSPs, education accounts like RESPs and flexible accounts like the new TFSA.

  • setting priorities and possibly deferring some items, as total spending may exceed your saving capacity and the maximum realistic returns on investments


Unknown said...

The establishment of investment objectives helps determine the degree of emphasis placed on each of these goals. Carefully examine your standard of living, resources and family needs and then realistically decide which investment goal best fits your needs.Short-term sacrifices may be necessary to provide for a comfortable future, and realizing this fact ten or twenty years too late may make important financial and life goals unattainable.
john edwin

CanadianInvestor said...

Yup John, I am on the same wavelength. Well put too. The hardest part is starting early enough.

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