Rethinking Time Horizon
by Noah Burns
Time horizon is one of the most important concepts to understand for your personal finances, yet I often see investors grossly underestimating their time horizon. In general, the longer the time horizon is for your investments, the more aggressive you can afford to be. So this underestimation of time horizons can lead to portfolios that are overly conservative, which costs investors opportunity for growth. If that continues over a long period of time, the lack of growth opportunities can compound into much larger problems. Traditionally, there are three questions that help guide your time horizon:
I think this can really be distilled to one question. When will these assets be spent? To best illustrate this, I’d like to take a look at a few case studies.
Case Study #1: Nearing Retirement.
- How long will you maintain the portfolio?
- When will you begin to use the income of the portfolio?
- When will you begin to access the principal of the portfolio?
I think this can really be distilled to one question. When will these assets be spent? To best illustrate this, I’d like to take a look at a few case studies.
Case Study #1: Nearing Retirement.
This is a quick one, but arguably the most misunderstood. What’s the time horizon for a 60-year-old who is going to retire at 65? They might look at their time horizon as five years long, but there are lots of retirements that are lasting well over 20 years. Yes, some of the assets will be spent five years from now, and six years from now, and so on, but really the time horizon is 5-25 years. It’s not just one number, it’s a range of when the spending is likely to occur.
We like our clients to get more conservative as more spending nears, but it decreases slowly over time instead of falling off of a cliff. If today you are working and tomorrow you are retired, it doesn’t mean you need to get immediately and significantly more conservative in your investments like flipping a light switch.
Case Study #2: The Millennial Family (my peers!)
We like our clients to get more conservative as more spending nears, but it decreases slowly over time instead of falling off of a cliff. If today you are working and tomorrow you are retired, it doesn’t mean you need to get immediately and significantly more conservative in your investments like flipping a light switch.
Case Study #2: The Millennial Family (my peers!)
Let’s consider a young family of high-income earners and a few kiddos. They have retirement assets, non-retirement assets, and 529 plans for the kids’ higher education costs. If all we did as advisors was look at the big picture asset allocation, then we wouldn’t be doing our job properly. These different types of assets have vastly different time horizons.
As discussed in the first case study, the retirement assets will be used 30-60 years from now. That’s a really long time horizon that encourages the clients to use more aggressive investments.
The time horizon for education costs is probably the easiest to understand. When will the child be 18-23? This is a much smaller span of time compared to retirement. That’s when most if not all of the spending and asset liquidations will happen. So as the child ages up toward those critical years, the assets should probably get slowly more and more conservative.
The time horizon for non-retirement assets is less clear. It’s important to drill down on what is the goal or purpose of the assets, or ask the key question: When will these assets be spent? In this case, half of the assets will be used for a home remodel in the next two years and half will likely be used during retirement. In this case, we may partition the assets. We could start by putting half in something that is ultra-conservative, yet still earning interest. The other half would likely be allocated similarly to a retirement account.
Case Study #3: Two 100-Year-Olds.
As discussed in the first case study, the retirement assets will be used 30-60 years from now. That’s a really long time horizon that encourages the clients to use more aggressive investments.
The time horizon for education costs is probably the easiest to understand. When will the child be 18-23? This is a much smaller span of time compared to retirement. That’s when most if not all of the spending and asset liquidations will happen. So as the child ages up toward those critical years, the assets should probably get slowly more and more conservative.
The time horizon for non-retirement assets is less clear. It’s important to drill down on what is the goal or purpose of the assets, or ask the key question: When will these assets be spent? In this case, half of the assets will be used for a home remodel in the next two years and half will likely be used during retirement. In this case, we may partition the assets. We could start by putting half in something that is ultra-conservative, yet still earning interest. The other half would likely be allocated similarly to a retirement account.
Case Study #3: Two 100-Year-Olds.
We have two 100-year old clients, and conventional wisdom might say that both have pretty short time horizons. One of these clients is spending 15% of their assets each year on home care and health expenses, and it’s going up each year. The other is only spending 2% of their assets.
For the client spending 15% of their assets, I would agree with the conventional wisdom. The time horizon here is short. Most, if not all, of the assets will be used in the next few years.
The other client is only spending 2% of their assets, which makes it likely that the assets outlast the client. So what’s the time horizon here? For this client, they consider the bulk of the assets as already belonging to their much younger heirs. We can consider having more aggressive investments compared to the other 100-year-old client. I’m not saying this person should be 100% stocks, but I do believe the time horizon of these assets is significantly longer than other 100-year-old investors.
So what is your time horizon? How will it change over time? These questions could be more complicated than you think. If you would like us to take a look at your assets and make sure that the appropriate time horizon has been considered, please call or e-mail us. We will be happy to hear from you.
Robert's Corner
Our Core Value: Life Is About Experiences and Relationships
A lot of advisors discourage client spending as much as possible. Not us. There are a few of our clients out there that we are begging to take a nice vacation or give to their favorite causes. These clients are the ones that built up this spending muscle, but frequently they need a big nudge to flex it.
We really believe in our core value, and we hope your life’s experiences and relationships are bettered by a relationship with us. Convincing you to actually spend your hard-earned money is part of that. It’s unnatural for people that have spent 40 years building wealth to spend it down at all, so don’t feel bad if this rings true to you.
How do we encourage more spending? It usually starts with an analysis of your distribution rate or an update to your retirement projections. If the math checks out, then we will be happy to support a trip, a charitable donation, an extra gift to your heirs, or all of the above and more. It’s just more fun and fulfilling to see the assets used when you’re around. If the math does not check out, you will now have renewed motivation to take steps to ensure your financial independence.
If you want us to re-run your retirement projections, please call us and set up an appointment with Noah.
Important! Estate Tax Changes Are Coming
There is a big estate and gift tax change coming. Unless legislation is enacted, the lifetime exemption will decrease starting in 2026, which means that large estates will owe a lot more in taxes if proper planning is not taken. You will very likely see this in the news over the next 18 months. That sounds like a long time to act, but the most effective strategies take time to implement. If you would like to talk about how this may affect your family, please call us.
For the client spending 15% of their assets, I would agree with the conventional wisdom. The time horizon here is short. Most, if not all, of the assets will be used in the next few years.
The other client is only spending 2% of their assets, which makes it likely that the assets outlast the client. So what’s the time horizon here? For this client, they consider the bulk of the assets as already belonging to their much younger heirs. We can consider having more aggressive investments compared to the other 100-year-old client. I’m not saying this person should be 100% stocks, but I do believe the time horizon of these assets is significantly longer than other 100-year-old investors.
So what is your time horizon? How will it change over time? These questions could be more complicated than you think. If you would like us to take a look at your assets and make sure that the appropriate time horizon has been considered, please call or e-mail us. We will be happy to hear from you.
This information is for educational and illustrative purposes only, is not a recommendation or investment advice, and is not indicative of future results. Individual results and circumstances will vary. Asset allocation does not ensure a profit or protect against loss.
Robert's Corner
Our Core Value: Life Is About Experiences and Relationships
A lot of advisors discourage client spending as much as possible. Not us. There are a few of our clients out there that we are begging to take a nice vacation or give to their favorite causes. These clients are the ones that built up this spending muscle, but frequently they need a big nudge to flex it.
We really believe in our core value, and we hope your life’s experiences and relationships are bettered by a relationship with us. Convincing you to actually spend your hard-earned money is part of that. It’s unnatural for people that have spent 40 years building wealth to spend it down at all, so don’t feel bad if this rings true to you.
How do we encourage more spending? It usually starts with an analysis of your distribution rate or an update to your retirement projections. If the math checks out, then we will be happy to support a trip, a charitable donation, an extra gift to your heirs, or all of the above and more. It’s just more fun and fulfilling to see the assets used when you’re around. If the math does not check out, you will now have renewed motivation to take steps to ensure your financial independence.
If you want us to re-run your retirement projections, please call us and set up an appointment with Noah.
Important! Estate Tax Changes Are Coming
There is a big estate and gift tax change coming. Unless legislation is enacted, the lifetime exemption will decrease starting in 2026, which means that large estates will owe a lot more in taxes if proper planning is not taken. You will very likely see this in the news over the next 18 months. That sounds like a long time to act, but the most effective strategies take time to implement. If you would like to talk about how this may affect your family, please call us.