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What is the financial life cycle?

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What is the financial life cycle?

One of the primary tasks within the financial planning process is setting goals with you as the prospective client, friend or family member. An important note about goal setting is that it requires you as the client to recognize that there are several phases throughout your financial life.

Just like we have phases in our personal life such as being a baby, then a kid, and then a teenager and so forth. We also have financial phases. So, what exactly is the financial life cycle?

Within your financial life cycle, there are five distinct phases.

  • Early Career (25 to 35 yrs. old)
  • Career Development (35 to 50 yrs. old)
  • Peak Accumulation (50 to 60 yrs. old)
  • Pre-retirement (3 to 6 years before retirement)
  • Retirement (60 to 66 yrs. old)

Together these five phases span your entire financial life. As you can see, the stages have an associated age window. Yet, I believe each individual is different and I don’t want you to pinpoint your phase by your age.

Also, some people will not experience all of the phases. Or, they will spend more or less time in any one phase. However, the vast majority of career-minded people will go through all five phases within the financial life cycle.

Early Career

The first stage of the financial life cycle is the early career phase. For most young adults, that means starting their first “real” job after college. As in, not the part-time job you took as a waiter, bartender or barista so you could have some spending money. I am talking about that dream job or career field where you feel you’ve been called. You’re young, ambitious and full of energy. The early career phase is the beginning of that life.

The goals of individuals and yourself in this phase often reflect that fact. For example, you just started your dream job and have no clue how to budget, save, or invest. The company is offering a 401(k) but you don’t know what that means or how much you should be investing. How do you consolidate your student loans or pay off your debts? If you’re like most people when they start their first job, you feel like a fire hose was turned on and you can barely catch a breath.

Another example of an individual who is in the early career phase might be engaged to their significant other or newly married. They often have young children or a baby on the way. The client and/or his or her spouse are establishing employment routines and further education to “climb the corporate ladder.”

Whatever the case may be, your financial life cycle has just begun. Often in this phase, you’re concerned about accumulating funds for a home purchase or paying off debt accrued through student loans and credit cards. One goal an advisor might recommend is building an emergency fund to meet unexpected contingencies and protect you from a potential financial disaster.

In most cases, your goals of retirement and estate planning will have a low priority in the first few years of the early career phase. Which is often the case for the majority of individuals. But, this needs to be considered and encouraged to build a comprehensive financial plan. Nestling money away now in retirement accounts can have huge implications through compounding interest.

Career Development

As you move into the career development phase of your financial life cycle, some goals may need revision. This phase is a time of career enhancement, upward mobility, and rapid growth in income. You might have advanced into management or a lead role. Transitioned to another company or started your own. New responsibilities mean more stressors, however, you’re rewarded with additional compensation and money.

For many individuals, seeing a bigger paycheck often leads to grander purchases that are unwarranted or needed. I learned as a financial planner, it is imperative to encourage individuals to acknowledge the increased income but understand they survived without it previously and should put it towards their outlined goals. This could be paying off the mortgage earlier, the car loan or contributing more to their 401(k).

Whatever the case may be, revising goals periodically might be necessary during the career development phase of the financial life cycle.

Peak Accumulation

The peak accumulation phase of the financial life cycle is where you have reached the top. You’re King or Queen of the mountain, raking in the dough. You’re moving toward maximum earnings and have the greatest opportunity for wealth accumulation.

I learned as an advisor, I should be monitoring your plan for any needed changes. The phase may include accumulating funds for special purposes, but it is usually a continuation of trying to meet the goals set for the major planning areas. Such as retirement and estate planning.

Pre-retirement

The pre-retirement phase; you see the light at the end of the tunnel, yet you’re worried if you will “have enough.” This is very common for individuals and often drives them to work “just” another year. But don’t let your fears drive your decisions.

Your career and income potential are winding down so restructuring investment assets to reduce risk and enhance income is the first thing you should do. Often recommended by your advisor. Next, focus on tax planning and evaluating your retirement distribution options relative to income needs and tax consequences.

Your financial advisor should be actively involved in keeping your financial plan on target to meet all your goals. By meeting the mark or even exceeding it, instills confidence that you will have enough once you retire.

Retirement

You made it! It’s time to relax and enjoy the fruit of your labors.

As you can guess, the final phase in your financial life cycle is retirement. Your advisor has kept your financial plan fine-tuned and now you enter the phase of enjoyment. A comfortable retirement income and sufficient assets to preserve purchasing power. While all of the major planning areas should have received attention throughout your financial life cycle, now is the time for the advisor to make certain that your estate plan is in order.

Once the estate plan has been established, relax and enjoy.

Conclusion

The comprehensive financial plan that is developed for you needs to be reviewed and revised periodically as you pass through the phases of the financial life cycle. Your financial goals will need adjusting as life’s circumstances change which is common. Priorities shift and these must be discussed with your advisor to ensure they’re aware. Don’t be afraid to tell them because they’re your advocate and will ensure all your goals are met.

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