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Determining Your Goals and What They'll CostIntroduction
We'd never show up at a party without knowing beforehand what type of party it was. Is it a formal dinner party for a dozen close friends or a frat-house kegger?
Yet we regularly invest, squirreling away as much as we can, without knowing whether we're saving enough for our goals. That's because most of us have no idea what our goals will cost.
Sometimes the goal's annual cost is easy to estimate. Think of your yearly mortgage tab. Annual college costs aren't that tough to tabulate, either: Add together what the average college student pays for the cost of classes, books, and room and board each year, multiply by four (or however many years you think the child will be in school), and you're at least in the ballpark.
Projecting your retirement living expenses is another matter entirely--especially if your retirement is decades away. It involves some dreaming, that's for sure. Ask yourself what type of lifestyle you want. Do you want to spend your retirement building birdhouses in your garage, or do you want to move to South Carolina and play golf every day? The first lifestyle will certainly cost less than the second.
Recreation. For many of us, retirement is about enjoying the things we denied ourselves while we were raising children or working. And those things--whether traveling across the country in an RV or taking up tennis--cost money. We'll likely eat out more, travel more, and see more movies, plays, and sporting events once we've left the working world. Those tickets aren't free.
Next, project how long you'll need to be paying for your goal.
Say for a moment that your goal isn't retirement, but sending your child through college. Will that expense stretch out over four years? Or is postgraduate study in the little one's future, too? Or maybe your goal is saving for a home and paying off a mortgage. The easy part is figuring out what you'd like to put down. But do you plan to use your investments to help pay your mortgage? If so, the goal for this pool of money may extend over 20 or 30 years, depending on the terms of your mortgage.
|1||How much of your preretirement income will you need in retirement?|
|a.||Less than 80%|
|b.||More than 80%|
|c.||It depends on your retirement lifestyle|
|2||To figure out how much money you'll need to pay for a goal, consider?.|
|a.||How long you'll be paying for the goal.|
|b.||How much the goal will cost each year.|
|c.||Both A and B.|
|3||What inflation-rate range do many financial advisors use for retirement?|
|a.||2% to 4%|
|b.||5% to 7%|
|c.||8% to 10%|
|4||The annual cost of which goal is the most difficult to calculate?|
|a.||Sending a child to college|
|c.||Buying a new home|
|5||Which costs should go down for most investors in retirement?|
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