As stock markets continue to jump up and down, it's important to remember some timeless principles through your financial stages in life. Often we need to focus on the basics no matter what stage in life you are at.
Early Accumulation (20’s and 30’s)
Independent life is usually starting at this stage. Many things can happen in your 20’s and 30’s. You may continue your education. You might start working at your first full time job. Your career is just getting under way. You might get married, set roots and even start a family. Often your goals are short term and while you should start setting money away for the future, typically your youth and inexperience cause you to start material accumulation. Chances are you have bought your first home and taken on one of your biggest financial responsibilities. Budgeting will be a key focus at this stage in life. You will have lots of expenditures and hopefully enough income to cover those expenses.
- Watch your debt levels.
- Amortize debt for as short a time frame as possible.
- Always pay off high interest debt
- Get a good credit history
- Start a savings habit (dollar cost average)
- Get your RRSPs started.
- Build an emergency fund
- Consider the benefits of a Tax Free Savings Account (TFSA)
- If you have a family, make sure you have enough life insurance
Mid accumulation (40’s and 50’s)
Your financial plan should be in full swing. In many cases you will be halfway to retirement and you will need to assess your success. Make sure you know your net worth by taking your assets minus your debt. It is likely that you have built up some net worth. If not, you better start getting serious.
As you progress in your accumulation phase, you will continue to reach your peak in earning income. At this stage it is not uncommon to pay off your mortgage and become debt free. While tax planning is important at any stage, you are likely to become more aware of its importance as time moves on. Your focus is really shifting from wealth accumulation to wealth management. Make sure you have some plans and goals in place.
Pre-retirement (50’s and 60’s)
The closer you get to retirement the more realistic it becomes. Your financial goals and needs have changed dramatically. Chances are, your experience in life has caused you to be more conservative and cautious when it comes to investing. You will start shifting from thinking growth and accumulation to safety and creating income from your portfolio. You will need to start planning for changes in cashflow and expenses. You should be ensuring that you enter retirement having little to no debt.
That magic date has come. It is now time to retire. You have hopefully prepared yourself already and taken a serious look at retirement income planning and replacing your lost income from employment. Pensions, government benefits, and RRIFs become the key to your financial success. You must take a hard look at lifestyle and determine what you want to do with your time and money. You’ve worked hard to get here so you want to make the best of it. Typically, you will be in the “ACTIVE” retirement stage. You will have the energy and physical ability to enjoy the time freedom. When you retire, it is likely that you have less income but also fewer expenses. Cashflow transition is really the name of the game here.
Stable retirement (70’s and beyond)
You have found your patterns and routines in retirement. You have done and accomplished many things in life. And the things you have not accomplished become less important. Your discretionary expenses are likely to drop but your medical expenses will likely go up. Your friends and peer groups age too. Some of your friends and associates will start dying forcing you to think about your assets. While you needed to plan much earlier, you start thinking about the estate, wills, heirs, life insurance, and long term care. Your housing needs may change and downsizing is a common practice.
As you get older, life can become more limited due to physical constraints. Financially, we are just not spending as much money and if our financial assets have lasted this long, the focus turns to estate preservation and estate maximization.
As you go through life and walk through these different stages, it is important that you plan ahead. In my opinion, you always need to be thinking at least 5 years ahead with some vision of the next 10 years. Far too often, people start planning after it is too late.
These stages are not described perfectly for everyone. The statements are simply generalization and will not apply universally. The key message is to make sure you take some time to think ahead and plan in advance of getting to these different stages.