Short answer. A goal is realistic when the yearly return it needs is one you can expect without more risk than you can live with. Work out that return first. Then ask what kind of investment has ever delivered it, and how far it fell along the way.
Step 1: Write the goal as three numbers
- Target. The amount you want.
- Date. When you need it.
- Start. What you have now, plus what you will add each month.
A goal without a date cannot be checked. "More money" is a wish. "Twice what I have, in ten years" is a goal.
Step 2: Work out the return the goal needs
Use the rule of 72 for a quick answer. Divide 72 by the number of years. The result is roughly the yearly return that doubles your money in that time.
| To double your money in | You need about |
|---|---|
| 18 years | 4% a year |
| 10 years | 7.2% a year |
| 6 years | 12% a year |
| 3 years | 24% a year |
Monthly additions lower the return you need. Fees and tax raise it.
Step 3: Match the return to the risk
Higher returns come with bigger falls along the way. Before you accept a target return, ask two questions:
- What kind of investment has delivered this return over long periods?
- How far has that kind of investment fallen in its bad years?
If you would sell in a panic after a fall that size, the plan will not survive its first bad year.
Step 4: If the goal is out of reach, change one number
- Move the date later.
- Add more each month.
- Lower the target.
Taking more risk is the fourth option. It is the one most likely to leave you further from the goal.
How Lumen checks a goal
Enter a target, a date and how much risk you can live with. Lumen tells you if the goal is within reach. If it is not, it shows you the gap.