Understanding Investment Time Horizons as Part of Retirement Planning

One of the consequences of the internet age is an ever-increasing lack of patience. We are used to finding what we want quickly and receiving near-instant gratification. While that may work with finding the right video or online shopping, it doesn’t work with investment time. Getting the maximum return on investments as part of a retirement strategy takes planning and patience.

When considering investments, including the investment time needed to get a return, there are no shortcuts. Get-rich-quick schemes don’t work, and even high-flyer strategies such as buying Bitcoin or signing up on Robinhood to play the stock market are high risk, and you are more likely to lose your investment rather than double your money. You wouldn’t risk your retirement savings at the roulette table, so rather than seeking quick cash, you want to develop an investment strategy that yields steady returns over time. Your investment time frames should match your retirement objectives, and understanding investment time horizons should be part of the process.

What is an investment time horizon?

An investment time horizon is the period of time you anticipate holding your money in an investment until you need it. Time horizons are dictated by investment goals.

For example, you may be planning to buy a home in five years, so your investment time horizon would be five years. If your son or daughter is entering middle school and you plan to pay college tuition, your investment time horizon would be 7-8 years until they turn 18. When you establish an investment time horizon, you need to assess the types of investments that will yield a return to achieve your goals. You also will need to assess your tolerance for risk when choosing investments.

Different types of investments will help meet different investment time horizons. For example, fixed investments, such as savings accounts, have a specified interest rate and yield predictable returns over time. A savings account continues to yield interest on the amount on deposit, and you can calculate the returns so you know exactly how much interest you can earn. With savings accounts, you earn continual interest, so you accrue earnings no matter when you choose to withdraw your money.

There are other types of investments that yield fixed returns but with different restrictions. Many individual retirement accounts (IRAs), for example, have a fixed interest rate, so you can calculate your return on investment. Other types of retirement investments, such as stocks, bonds, and mutual funds, yield a return based on market performance, which means they are higher risk and the rate of return is unpredictable, making it difficult to establish a firm investment time horizon. 

Certificates of deposit (CDs) also have a fixed interest rate and usually yield a higher return than a savings account in return for investing your money for a specified period. With CDs, the understanding is you leave your money on deposit for anywhere from three months to five years. The longer the terms of the CD, the higher the interest rate, although there are penalties for early withdrawal.

What about when the investment time horizon isn’t fixed?

Other types of investments are less predictable. Any investment based on stocks, bonds, mutual funds, or any market-based returns will accrue value based on the market performance. Most 401(k) plans offered by employers, for example, are based on a mix of mutual funds, bonds, and similar investments, so the returns are less predictable.

Despite the ups and downs of the market, establishing a balanced investment portfolio is a good strategy for retirement savings. Over the past decade, the S&P index yielded an average return of 13.9%, which is a substantially higher yield than any savings account. The keyword here is average. There is no way to tell which years are up and which may be down, but when you consider stock performance for the last 100 years, long-term investors tend to come out ahead—assuming they choose the right stocks.

If investing in the stock market seems a little too risky, mutual funds may be a good alternative. Mutual funds consist of stocks, bonds, equities, and other types of investments that are pooled into a single fund that is managed by professionals. You can usually tell how good a mutual fund is based on past performance, although there is no guaranteed return, so you can’t predict an investment time horizon.

If you want to invest but don’t want to bother managing your investments, a target-date fund may be an option. Target-date funds have become the most commonly used option in 401(k) plans and are a set-it-and-forget-it form of retirement investment where you give your money to a fund manager and let them manage it until you are ready to retire. Target-date funds may seem attractive if you want simplicity, don’t plan to change your investment strategy, and don’t feel you may need to tap your retirement savings for any reason before retirement. Since target-date funds are made up of stocks, bonds, and other market-driven investments, there is no way to predict how much you will have available when it comes time to retire.

How can you maximize returns using investment time horizons?

To get the most for your money in the time frame you want, you need to start by setting goals for your investment returns. If you have short-term needs or have a scheduled expense, such as a car purchase, a down payment for a home, or college tuition, consider investments that guarantee returns in a specific time frame, such as savings accounts or CDs. If you can extend your investment time horizon, you are likely to earn greater returns.

Retirement investment strategies, for example, require longer investment time horizons for higher returns. That’s why most retirement portfolios include stocks and investments that yield higher returns over time. The longer you can stay invested, the more you can offset any market volatility and come out with more money in the end.

Of course, any investment strategy has to match your goals and your taste for risk. Younger investors may be comfortable with higher-risk investments since they have more time to recoup potential losses. For most people, the closer you are to retirement age, the more conservative your investments are.

This is where an investment professional can be valuable. They can show you what types of investment options are available, including time frames, and help you weigh risks against returns. They also can help you develop a balanced retirement investment strategy that can evolve with changing needs.

If you want to learn more about your investment options and how to plan for your retirement, why not contact iQCU’s investment and retirement services? The investment professionals at iQ Credit Union will gladly advise you about strategies to achieve your financial goals.