Start young. Look away from your 401(k) when the market freaks out. Don’t sell.
A lot of the investment advice you hear probably has to do with saving for retirement. Yet many people need to use the market’s returns to achieve other goals, too.
Often it also makes sense to invest for objectives like a down payment on a house, starting a business or sending a child to college, among other milestones that can arise long before you go gray or consider leaving work for good.
“Life is so much more than retirement,” said certified financial planner Peter Creedon, CEO of Crystal Brook Advisors in Mount Sinai, New York.
It can be intimidating and confusing to juggle multiple goals with different timelines. CNBC spoke with financial advisors about how to best do so.
First, prioritize
To understand how to prepare for multiple goals, start by ranking those ambitions from most to least important, said CFP Douglas Boneparth, founder and president of Bone Fide Wealth in New York. Your list will be subjective, he said. “Personal finance is personal.”
Achieving financial independence — being able to retire — may not be No. 1 for you at the moment. Instead, you may decide that buying a house is your top focus.
That’s OK, but you also want to know the consequences of prioritizing one goal over another, Boneparth said. Maybe buying that house, for example, means you’ll need to work two more years down the line.
“You can solve these puzzles,” Boneparth said.
Timeline matters
Once you have your goals defined, how should you save for them?
Barry Korb, a CFP and president of Lighthouse Financial Planning in Potomac, Maryland, has a fairly simple way to determine if you should be using the stock market for a particular objective.
If the deadline for when you’ll need the money is under five years, it’s too risky to use equities, he said, adding that in such cases you’re better off saving with cash or certificates of deposit.
So much comes down to timeline.
One of Korb’s clients recently told him that their child, a senior in high school, had been admitted to an Ivy League school. They told Korb they had $240,000 in a 529 college savings plan — all in equities. (529 accounts are named after a section of the tax code and allow people to invest for college while avoiding taxes.)
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“I told them to immediately transfer 80% to 90% of the savings to cash equivalents,” Korb said. “Certainly, they would rather risk, say, a 50% gain over the next few years as opposed to finding themselves with a 50% loss.”
On the other hand, if the client’s child was 1 year old, taking that same risk makes sense. In fact, saving with only cash would cost them.
If you begin investing at your child’s birth for their college expenses, about a third of your goal could come from investment earnings alone, said Mark Kantrowitz, a financial aid expert.
You can enroll in an age-based 529 plan, which automatically becomes more conservative — more tilted toward bonds and away from stocks — as your child nears the end of high school.
How much risk?
Understanding your risk tolerance is particularly important when it comes to shorter-term goals because you have less time to ride out market downturns, experts say.
Still, a lot of the wisdom around retirement savings also applies to these goals. Mainly, you want your allocation to become less aggressive as you move closer to needing the cash.
For example, let’s say you want to have your down payment on a house ready in seven years.
Boneparth said he’d typically recommend investing between 40% and 60% of that savings in stocks, and each year easing more out of equities. Avoid the temptation to get complacent with too large a stock concentration.
The last thing you’d want to happen, Boneparth said, is to be over-allocated toward stocks and experience a big correction right before you were hoping to close on a house.
Where to save for different goals
Of course individual retirement accounts and 401(k) plans are where you salt away money for your old age. For college savings, most experts recommend using a 529 plan because of the tax benefits.
When it comes to other goals, like starting a business or coming up with a down payment, you should usually use a brokerage account, Boneparth said.
Although you can tap some retirement accounts for buying a house and other objectives, there comes a downside with doing so, he added: “You’re interrupting the compounding going on there for a longer-term goal.”
