Invest to Win and Avoid the Blunders 136 The Langes now have a specific financial goal to plan for. They need to grow their current investment assets from $160,000 to $1.28 million in 20 years. They will continue to make contributions to their 401(k) plans and other investments. They will also need to determine what investment return they should seek and what asset allocation will provide them with that return. In other words, they need to develop a roadmap. Investment Return It is very important to know what level of return will get you to your destination. If you can attain your retirement goal by implementing a strategy that earns 7% per year, then there is no need to take the additional risks of attaining a 13% average return. On the other hand, if you need an 11% return to meet your goals, then earning 5% will result in great disappointment. This section helps you to determine the level of investment return you will need to achieve your goal. The actual computation required to determine the appropriate investment rate is very complex. However, I have created a much easier method that approximates the investment rate. The esti- mates provided by this method are very close to the "true" rates computed using the more complex equations. [2] To start, you must compute a variable that I call Investment Capital. This is an estimate of the amount of money you have invested and will contribute in the future. The simple equation is: Investment Capital = Value of Current Investments + (1/2 × Annual Contributions × Years to Retirement) From this equation, compute the Capital Fraction as: Capital Fraction = Investment Capital ÷ Financial Goal For example, the Langes would compute their Investment Capital as $276,000 (= $160,000 + 1/2 × $11,600 × 20). The Capital Fraction variable would then be computed as 0.215 (= $276,000 ÷ $1,282,289). To determine the appropriate investment return, compare your Capital Fraction to Table 15.3. Spe- cifically, identify the column that represents your number of years to retirement. In that column, find the number that most closely matches your Capital Fraction. Once the closest number is found, follow that row to the left to find your investment return. For example, Kevin and Kali would follow the 20-year column looking for a match to their Capital Fraction (0.215) value. The closest match is 0.216, which is identified in bold type in the table. Looking to the left along this row reveals that the Langes should develop an investment strategy to earn 8% per year. Table 15.3. Annual Return Needed to Reach Financial Goals * Years to Retirement Investment Rate 5.0% 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 5 0.745 0.728 0.713 0.697 0.682 0.667 0.653 0.639 0.625 0.612 0.599 10 0.551 0.529 0.508 0.488 0.469 0.450 0.432 0.415 0.399 0.383 0.368 15 0.442 0.416 0.391 0.367 0.345 0.325 0.305 0.287 0.270 0.254 0.239 20 0.347 0.321 0.297 0.274 0.253 0.234 0.216 0.199 0.184 0.170 0.157 25 0.276 0.252 0.230 0.209 0.191 0.174 0.158 0.144 0.131 0.119 0.108 30 0.227 0.204 0.184 0.166 0.149 0.134 0.120 0.107 0.096 0.086 0.077 35 0.192 0.172 0.153 0.136 0.121 0.108 0.096 0.085 0.073 0.064 0.056