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Retirement Goals

Investing is a long-term proposition. It takes many years to build wealth. Your investment plan normally starts at the goal of how much money you will need at retirement age. Today's life expectancy is in the mid-80s, and if you plan to retire between the ages of 55 and 65, a large sum will be required at retirement, and this will be drawn on for many years (offset by Social Security or any private pension plan income).

A Certified Financial Planner (CFP) will likely create goals based on your planned retirement age. He or she will develop an investment schedule and later a drawdown plan of some kind.

During your working years, you must save a certain amount of money per month in an IRA or 401k plan (or equivalent), and over a specific number of years it will grow at a compound rate (earning interest on interest). An assumed rate of return will be used by your CFP, usually around 7% or 8%, to arrive at a planned retirement amount 25 to 35 years from now. The total of your investment during this time is called your principle.

A drawdown plan is how much you will take from your principle when you retire. You likely will plan to live between 15 to 25+ years in retirement. Your principle will be reduced during retirement, and the interest from this principle will be less each month as you draw down from the total. The ideal situation of course is to save a lot during your working years, and never take from your principle (to live off the interest income alone).

A CFP will explain the risks of investing and interview you for your risk tolerance. In general, the younger you are, the more risk you can take. If you have 30 years of investing ahead of you, there is a greater chance that drops in the economy or stock market can be recovered from in the future, and thus you can afford to take on greater risk. Oppositely, the closer you get to retirement, the less likely you could recover from a large drop in the stock market over time, and should take less risk.

Today, many investment companies offer model portfolios. They may offer a fixed percent of your savings into different "baskets." A model at age 30 might be 65% stocks and 35% bonds. A model at age 50 might be 50% bonds, 30% fixed income, and 20% stocks. A model at age 70 during retirement might be 60% fixed income, 30% bonds, and 10% stocks.

A CFP will likely meet with you at least once per year, to suggest any financial portfolio changes based on current industry or market trends. In the 1990s, before the tech driven stock market crash, buy & hold indefinitely was the theory, and a lot of people lost a lot of money (which I did not adhere to as it was historically never a pervasive strategy). Jim Cramer, the famous stock market analyst, coined the phrase buy & homework, which is a more appropriate mindset.

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