Topic 5.3 · Saving and Investing for Education, Housing, and Retirement Goals
Saving and Investing for Education, Housing, and Retirement
Planning for college, a home, retirement and giving; how compounding, risk, fees, taxes, inflation and biases affect returns; and building a diversified plan.
30 min read Reviewed
Learning objectives
- 5.3.AExplain how financial planning supports an individual’s ability to achieve goals related to postsecondary education, housing, retirement, and charitable giving.
- 5.3.BDescribe factors that impact an individual’s or household’s return on financial assets.
- 5.3.CRecommend a saving and investment plan based on the postsecondary education, housing, and retirement goals, time horizon, and risk tolerance of an individual or household.
Objective statements © College Board, quoted from the Course and Exam Description.
Big long-term goals
| Goal | Typical funding | Key decisions |
|---|---|---|
| Postsecondary education | Savings, student loans, scholarships, grants, work-study | Where to go and what to study. Federal student loans may have lower rates and better terms than private loans, and may be subsidized |
| Housing | Savings (down payment) + a mortgage | Rent vs. buy. The monthly payment depends on loan size, term and rate (fixed or adjustable) |
| Retirement | Employer plans, individual accounts, investments | How much to save, how early, and in what assets |
| Charitable giving | One-time, recurring or legacy gifts | Which missions to support. Giving may bring tax deductions |
Couples who combine finances avoid strife by discussing shared goals. Tools like automated savings and payroll retirement deductions help overcome saving barriers.
What drives investment returns
- Time and compounding: starting young and holding long lets returns build on returns.
- Risk: insured or guaranteed assets are low-risk and low-return. Individual stocks are higher-risk with higher expected return.
Key terms
- Mortgage
- A loan used to buy a home, repaid monthly. The rate can be fixed or adjustable.
- Mutual fund
- An investment that pools many investors' money to buy stocks and/or bonds.
- Compounding
- Earning returns on previous returns. Its effect grows dramatically over long periods.
- Real return
- Return adjusted for inflation (roughly nominal return minus inflation).
- Diversification
- Spreading money across assets with different risks and returns to pursue growth without excessive risk.
- Time horizon
- How long until the money is needed.
- Broker
- A firm that individuals must go through to buy and sell stocks and bonds. Discount brokers charge lower fees and give less advice than full-service firms.
- Index (benchmark)
- A measure of a market segment's performance, such as a stock index, used to compare returns.
- Overconfidence bias
- Overestimating one's skill, which leads to unnecessary risk.
- Loss aversion
- Feeling losses more strongly than gains, which can lead to selling too early at a loss.
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