Your investment time horizon is an important consideration when determining a suitable investment strategy. Understanding your time horizon for each of your investment accounts helps ModernAdvisor recommend the most appropriate portfolio to reach your investment goals.

While your investment time horizon may seem like a straightforward number, determining it can be more complex for several reasons. For one, not everyone uses the same definition when it comes to withdrawing funds from their account. Many consider the time horizon to be the number of years before a significant portion of the funds are withdrawn. However, the threshold for what constitutes "a significant portion" is somewhat subjective. Some practitioners use 30%, while others may use 40% or 50%.

To help you determine your time horizon, we have included a few common examples below.

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If you are savings up to purchase a home or a vehicle, you would simply take the number of years from today that you would withdraw funds from your account in order to purchase your home or vehicle.

Example: If you are 30 years old and you want to purchase a home at age 35, your time horizon would be 5 years.

If you have multiple large purchases that you expect to occur at different times, it might make sense to open a separate account for each goal to better align the investment strategy with the specific time horizon for each purchase. For example, if you are saving to buy a house in 3 years and a vacation property in 10 years, the timeframes are different enough that using separate accounts, each with its own strategy, would make sense.

When it comes to retirement, things work a little differently if you are slowly withdrawing funds from your account over time compared to making one large lump sum withdrawal. Your time horizon would be determined by taking the length of time you want your funds to last you in retirement and add the time between today and your target retirement date (if you have not retired already).

Example: If you are 40 years old and you want to retire at age 65 and you need the funds to last until age 100, you would have a time horizon of 25 years before retirement and 35 years in retirement, for a total of 60 years. The first 25 years would be considered the accumulation phase, when you are adding funds to your retirement accounts. The subsequent 35 years between the age of 65 and 100 would be considered the decumulation phase when you gradually withdraw funds from your account.

In practice, you would most likely reduce equity exposure when you retire. Technically, you would not have a time horizon of 35 years in retirement in the example above, because you are making small withdrawals over a long period of time instead of one large lump sum withdrawal. In this case, we recommend that you change your investment goal to “Generate Income” after you retire and enter your anticipated annual withdrawal amount from your investment account. Our algorithms will use your anticipated withdrawal amounts to determine the anticipated timeframe and a suitable portfolio.

When it comes to education savings, your time horizon would be determined by the length of time until you start withdrawing funds from your account, whether it is in a lump sum or periodic withdrawals.

Example: If your child is 5 years old and you expect them to go to university when they are 18 years old, your time horizon would be 13 years. Even though you may withdraw the funds over 4 years, the withdrawal window is relatively short, so it is prudent to set the time horizon at 13 years and reduce equity exposure as your child gets closer to 18 years old.