Navigating the 5 Financial Stages

As we go through life, we pass milestones that mark transitions into different phases of life. Financial transitions accompany these turning points. Our goals change and our priorities shift in response to these changing life needs.

While everyone’s financial journey is different, most people pass through five primary financial stages as they age. During each stage, income, spending patterns, financial priorities, and goals tend to change in predictable ways. Knowing which financial goals to work toward at every point can help you successfully navigate these key transitions and avoid critical mistakes.

Stage 1: Starting Out

Financial success in your twenties and thirties is all about building good financial habits and staying out of debt. In this phase of life, you might be attending university, meeting a life partner, and exploring your career options. If spending outstrips income, budgeting and debt management become critical.

Financial goals typically include:

  • Paying off student loans and staying out of debt
  • Building savings
  • Saving for a car or home
  • Establishing a solid credit history

Stage 2: Building and Nurturing

As you get settled in your career, your income will grow, and you can devote more financial resources to long-term goals, such as retirement. If you get married and have a family, protecting your loved ones from unforeseen circumstances becomes critical.

While some people will still be paying off student loans well into their thirties and forties, others can focus on boosting savings rates. As your income increases, it can be easy to fall into patterns of lifestyle inflation; working with a financial professional can help you to identify your goals and stay on track as you work toward them.

Financial goals typically include:

  • Increasing income through promotions and training
  • Buying a house
  • Saving for a child’s education
  • Minimizing taxes
  • Increasing retirement savings

Want to be a millionaire? Start early. By making small, regular investments to retirement accounts in your twenties and thirties, your savings can grow tax deferred for decades. Starting early could easily make you a millionaire by the time you retire.

Stage 3: Looking to Retirement

As you enter your fifties and sixties, you might be in your peak earning years. If your kids also leave home, you can really boost your retirement nest egg with the extra income. However, you might also be helping your kids pay for their educations or milestones, such as weddings or first homes. Many preretirees are also taking care of elderly parents while balancing their own savings goals. Now is a critical time for retirement preparation; work with a professional to evaluate your current situation and test different retirement scenarios to help ensure that your nest egg is large enough.

Financial goals typically include:

  • Maximizing retirement savings
  • Paying off a mortgage and other debts
  • Helping kids establish themselves
  • Caring for elderly parents
  • Minimizing taxes
  • Preparing for retirement

Feel as if you have a late start on saving for retirement? You’re not alone. A 2016 Retirement Confidence Survey found that just 20 percent of workers age fifty-five and older are confident about having enough money to live comfortably in retirement; A staggering 13 percent are not at all confident about their retirement preparations. If you’re worried that it’s already too late to have the retirement you want, take heart. It’s never too late to start. Here are a few things you can do right now: 1) Speak to a professional about your retirement goals. 2) Take advantage of catch-up contributions to sock away as much money as possible. 3) Prepare for a gradual transition into retirement to allow your savings to grow. 4) Cut back on your expenses to maximize savings and minimize your retirement budget. Remember: you’ll never meet your financial goals if you don’t get started.

Stage 4: Transitioning to Retirement

With Americans increasingly living into their eighties, nineties, and later, retirement today looks very different than in decades past. If you’re like many retirees, you might want to work as long as possible or transition into retirement gradually through consulting or part-time work. Easing into retirement can help you make the psychological adjustment and give your savings longer to grow. Travel, hobbies, and family time might become big parts of your life as you get to work on your bucket list. At this point in life, it’s important to have a good grasp of your financial situation and to have strategies for helping your money last as long as you need.

Financial goals typically include:

  • Turning retirement savings into income
  • Managing longevity risk
  • Maximizing Social Security income
  • Minimizing taxes
  • Supporting an active lifestyle

Stage 5: Entering Late Retirement

Life in your eighties and beyond will look different for everyone. For some, health concerns and aging will take center stage. For others, staying independent for as long as possible is their primary goal. You might travel less in these years if your mobility decreases and your interests shift to your family and community. Legacy and estate strategies become more important, and it’s critical to begin to involve trusted relatives in your financial arrangements. If you don’t already have legal protections in place, you should work with a legal team to draft powers of attorney and health directives.

Financial goals typically include:

  • Optimizing retirement income
  • Mitigating risk of running out of savings
  • Managing health-care expenses
  • Creating a lasting legacy
  • Supporting aging through living arrangements

Are you prepared for cognitive decline? Cognitive decline is a painful issue that no one likes to think about. Unfortunately, many seniors find themselves at risk of fraud, abuse, and theft when their mental faculties start to slip. What would you like to happen if your loved ones notice that you are no longer able to manage your finances? Creating contingency plans and giving your financial professional permission to contact a trusted relative can help you protect your hard-earned savings as you age.

Action Items for Each Financial Stage of Life

Starting Out

  • Develop a budget
  • Pay down student loans
  • Build emergency savings
  • Maximize employer match to your retirement account
  • Sign up for auto-escalation to increase salary deferrals into your workplace retirement plan each year
  • Learn to negotiate to increase your salary

Building and Nurturing

  • Get life insurance
  • Add beneficiaries to financial accounts
  • Create estate strategies
  • Increase retirement savings

Looking to Retirement

  • Maximize retirement savings with catch-up contributions
  • Prepare for health care in retirement
  • Discuss your retirement goals with a professional
  • Identify the best Social Security claiming strategy

Transitioning to Retirement

  • Meet with a professional to review your financial situation
  • Create a retirement budget
  • Build retirement income strategies
  • Review health-care preparations

Entering Late Retirement

  • Prepare to downsize or move into alternative housing options
  • Review estate and legal preparations Include trusted friends or relatives in your finances
How We Can Help

Your financial life is defined by a progressive series of transitions and important life milestones: a first job, marriage, children, retirement, and more. As you move through these different stages of life, your financial needs change, and the value of professional advice can become more obvious.

As changes occur, it’s important to review your financial strategies to make sure they support your financial goals. If you are working with a financial professional, keep him or her informed about life changes. If you’re not currently receiving professional advice, you might find that sitting down with an objective professional can help you understand your options and gain clarity about the future. If you or someone you love is experiencing an important life transition, give us a call. We’d be happy to help.

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