We have been asked many times over the years, "What are the different financial decisions I should be thinking about at this stage in my life?" Of course, everyone's situation is different, but on average, you do start to see a natural progression that many people go through. We call this the financial stages of life, and this can be broken down in many different ways, from very broad concepts such as accumulating wealth to distributing wealth, or it could get very granular. Below, we will take a middle approach and outline five general stages that we see many people progress through in this day and age.
STARTING OUT
Often in this stage, you may have just completed college or are in the process of completing college. These are very formative years and ones to focus on building great habits for decades to come. This is a stage in life where many are focused on their personal debt burdens, typically in the form of large student loans. It is important at this stage to focus on your debt and understand the long-term amount you are paying on interest. This means analyzing your loan, paying more than just the interest on your debt, and looking to see if there are lower interest loans available. Additionally, this stage in life offers a great deal of freedom and flexibility, so make sure to live within your means and avoid high-interest payments on credit cards. Budgeting is one of the most important items to focus on at this stage. Lastly, this is an ideal time to start saving—first by establishing an emergency fund, then by transitioning to an employer-sponsored plan like a 401(k).
STARTING A FAMILY
This stage may start with marriage or the thought of marriage. A key aspect of this stage is growing financial literacy and working towards greater communication as a unit on financial matters. As this grows, it is an ideal time to look at a life insurance policy and disability insurance policy to ensure the loved ones around you are well protected. In conjunction with that, it is a good time to review your estate plan to ensure your spouse or children are properly taken care of. After these items, it is an ideal time to increase contributions to your employer-sponsored plans and start investment accounts outside of your employer. A final item that we often see analyzed at this stage is starting to save for your children's college education plans.
PRE-RETIREMENT
This stage is really a refinement stage. It involves the culmination of decisions made in the last two stages and pulls together all of your savings to work towards understanding what retirement could look like. It is fine-tuning when retirement will happen and what it actually means to you. Often, we see this as the peak earning years when incomes are high, and kids may be off in college or beyond, which means discretionary income is also quite high. This is a great time to maximize retirement savings, potentially work towards paying off a mortgage, and start finding a retirement community that you would enjoy. Lastly, it is important to start analyzing long-term care needs in retirement to ensure that if something happens to you, your assets and your family are properly protected.
EARLY RETIREMENT
Retirement can mean many different things to different people. With that in mind, this is a transition stage. It may involve transitioning to a more fulfilling career or traveling the world. At the core of this stage is turning your retirement savings into income, which can be a daunting feeling for many. It is crucial to understand and work to analyze longevity risk, meaning that as people are living longer on average, they may be retired longer. This makes it important to ensure that your assets last the rest of your life. Finally, this is a stage to really watch the tax consequences of your spending habits.
LATE RETIREMENT
Again, this stage can come in many different forms, but a key transition that we see happen many times is the psychological change to focusing on your legacy. This may involve spending more time with family and sharing stories, or putting a large emphasis on charitable endeavors and the impact on your community. It is a key time to fine-tune your estate plan to ensure all of your documents are properly updated, from healthcare directives to power of attorney agreements, to understanding the distribution flow to your family or charitable organizations.
There are many other items not highlighted that may be important to your situation at each stage along the way. The most important takeaway from this article is the power of starting early and thinking ahead to future stages. Life is a culmination of decisions along the way, and we hope that this helps to provide an initial roadmap for several key financial stages.