Investment Planning


Investment planning is a very extensive topic. My intent isn’t to be comprehensive or one-stop-shop here. However I will address the fundamental things that you should know and point you to other useful resources.

Retirement planning goes beyond investment planning. It also considers issues such as IRAs and Social Security, long term care insurance, health savings accounts, Medicare and estate planning. If you’d like to learn more, I recommend the book, “Your Complete Guide to a Successful and Secure Retirement,” by Larry Swedroe and Kevin Grogan.

Now let’s take a look at an important component of investment planning.

The Investment Policy Statement (IPS)

A key element of investment planning is an Investment Policy Statement (IPS). I recommend that every investor create one. I would guess that the vast majority of investors (90%+), with the exception of those with higher net worth who work with an advisor, don’t have one. The majority haven’t even heard of the concept. So what is it?

“An investment policy statement is a statement that defines general investment goals and objectives. It describes the strategies that will be used to meet these objectives and contains specific information on subjects such as asset allocation, risk tolerance, and liquidity requirements.” See for an example IPS.

For example, an individual may have an IPS stating that by the time he or she is 65 years old their job will become optional, and their investments will return $50,000/yr. in today’s dollars given a certain rate of inflation. This would be only one of many points included in an IPS. It would also include general guidelines outlining what the individual wants to leave behind to loved ones when he or she dies. See Investment Policy Statement – IPS on Investopedia.

How do you create an IPS? One way is to work with a qualified financial advisor who will gather information and build one for you. You can also create your own using the guidance here and on the web, e.g. the Bogleheads website. You can also check out Morningstar, which has a free template. Here is an overview of the steps:

  • Define your investment objectives.
  • Utilize the passive investment philosophy outlined here.
  • Assess your risk tolerance in terms of what percentage of your portfolio you can stand to lose in a given year, being as honest and objective as possible (use past behavior as a gauge).
  • Look at example portfolios here for ideas and design the one that most closely matches your return goals and risk/reward preference.
  • Use online calculators such as those at Morningstar or Bankrate to determine what portfolio design, rate of return and savings amounts will allow you to meet your goals.
  • Utilize the example holdings here or research others if you have the time and ability to determine what to buy.
  • Pay attention to tax optimization strategies in terms of where to place assets.
  • Implement your policy slowly over time if your current approach is significantly different than what is recommended here so that you aren’t adversely affected by buying high or selling low, or by incurring significant taxes.
  • I realize that the average investor may not have the ability, interest or confidence to create their own IPS. However, if you have spent significant time on my site and understand the content, you probably have the wherewithal to do it yourself. If not, I recommend you work with a qualified investment advisor who meets the criteria I outlined here.

Retirement Planning Calculators

The retirement plan requires an estimate or forecast of future financial scenarios. Planners utilize a retirement calculator to accomplish this. Depending on the sophistication of the calculator, it involves inputting variables such as savings contributions, other retirement income amounts (e.g. social security, pension), expected rate of return, retirement date, life expectancy and tax rates. Most calculators will show expected outcomes in terms of retirement income and projected asset balances. More advanced calculators use Monte Carlo simulations which show outcomes under varying scenarios and probabilities of meeting investor goals.

This is an iterative process, with the investor making decisions on trade-offs and inputting different amounts for the key variables. For example, investors might decide to save more and spend less until retirement to generate higher income in retirement. Some may decide to save less and take on more portfolio risk to generate higher expected portfolio returns.  These are simple examples of trade-offs. Each investor will have their own value system. A full discussion is beyond the scope here.

There are numerous free calculators available on the web that will help you determine the right combination to reach your goals. Here are a few you can try: Bankrate’s Retirement Income Calculator and the more advanced Flexible Retirement Planner from Random Walk Ventures.

Once again, you may prefer to work with a qualified financial advisor who will have the tools, knowledge and skill to generate the numbers for you.

Go to the Next Article: Investment Psychology