This has always struck me as a question that doesn’t make sense.
In theory if a financial adviser asks their client this question, they would shoot back a defined time frame i.e. 3 years.
In reality clients usually answer, “I don’t know”.
This is because there are two different ways to define an ‘investing time horizon’. The first is the technical definition, explained on Investopedia.com: ‘time horizon is the length of time over which an investment is made or held before it is liquidated’.Yet in the case of retirement planning most people don’t know how long they’ll have to invest. A recent quote I came across framed this in a much clearer way: ‘Your time horizon is the shortest period over which you may be forced by circumstance, behaviour, prudence, constituencies, governments or outside forces to sell what you own.’This doesn’t answer the question for you as an individual, but it does at least point in the right direction. If you plan to retire in 10 years’ time, what is your time horizon? For some of your savings, it will be 10 years i.e. you might need $60,000 to live on in your first year of retirement. For some of your savings, it will be 30 years i.e. 20 years into retirement, you will still need some money to live on.And for some of your savings, it might be 6 months, i.e. due to a medical or family emergency, you might need to come up with a lump sum quickly. So, when I think about this question, I don’t tend to think of it as a ‘one size fits all’. Different amounts of your savings will need to be ‘earmarked’ for different times during your retirement. It’s only once we work through all the possibilities as to why you’ll need money during your retirement, only then can we work out what time horizon applies to which parts of your savings.Written by Dallas Davison.