Understanding the 5 Financial Stages of Life


Understanding the 5 Financial Stages of Life


“I wish I was a child again, so I don’t need to worry about paying bills.”

Such is the phrase of many people going through that point in life known in media as “adulting” – or being responsible enough to actually care about where your money goes.

Whether we like it or not, money is inseparably connected to our life. From a financial perspective, money should not be the root of all evil. Money is what you make to have the finer things in life, not necessarily to make you rich—but something you need to have security so you and your family can have a comfortable life, plus some extra perks.

Going through different milestones in life also calls for different aspirations. What you dream of as a child is not the same when you reach college. What you may have aspired to in your twenties has now changed in your forties.

Many of us were not really educated in school when it comes to handling money. The majority of graduates who go into the workforce barely have any idea regarding the habits they should develop the moment they receive their first paycheck. Only a few are actually aware of how important it is to set their financial goals. You’ve come to the right page if you want to equip yourself with basic knowledge about the right attitudes toward your finances according to your life stage.

Let’s get started.

Stage 1: Entering the Workforce – Early Career Years

If you are still at this stage and you are reading this blog post, congratulations! You should know that the first step toward better financial literacy when you are in your early career years is making a budget and tracking your expenses. If you are still paying your student loans, prioritize paying off your debt. Remember that you need to build a good credit history while in this stage of life. When you have a favorable financial standing according to bank standards, it becomes easier to purchase an asset such as a car or a dream home on credit once you plan on settling down maybe five to ten years from now.

You should also start planning your retirement and take advantage of 401(k), 403(b), Roth IRA and the likes that your employer might be offering. Also, even when you’re still in your 20’s and single, a disability insurance policy is crucial. This is to protect your income in case of a sudden event that prohibits you from working and earning. If you get seriously sick for example, disability insurance can cover your expenses while recuperating and you don’t have to incur debt because of medical expenses.

In summary, these are the things you must accomplish during your early career years:

  1. Build your savings and establish a good credit history.
  2. Avoid increasing your consumer and high-interest rate debts any further and pay the outstanding ones as soon as possible.
  3. Live within your means.
  4. Start thinking about your retirement and set up your financial accounts.
  5. Get disability insurance.

You may also welcome the idea of scouting for a reliable financial planner. As you advance in your career and possibly consider starting your own family at the later part of this stage in your life, a fee-based expert in wealth management with an eye on your goals can help you out in ensuring that you are on the right track in terms of your finances.

Stage 2: Family and Career-Building Years

Are you about to settle down or have already built a family? Settling down is more than just getting married and having your dream house. It comes with greater responsibilities and of course greater expectations. It is not a matter of your personal dreams anymore because your aspirations have to match your spouse’s, especially when it comes to building a home– a.k.a. having kids.

Man and woman working

Of course, what first goes to mind is buying a house. Buying such an asset is important, especially if the family is growing. However, buying a house also means securing your budget for maintenance, amortization, utilities, and other expenses. Therefore, protecting your income becomes all the more important than when you were single. This is to keep your family protected in the event of some of life’s risks, such as an untimely death and temporary or permanent disability.

In this life stage, your goals should include:

  1. Buying life insurance.
  2. Purchasing health insurance.
  3. Updating your disability insurance.
  4. Reviewing your estate plan and preparing your will.
  5. Saving for your child’s college education.
  6. Starting your own business or building your career further.
  7. Growing your savings.

While saving will always be an important goal for every life stage, spending on things that can protect your family from risks is always a good investment.

Setting up your estate plan and preparing your will are also vital as you increase your assets and produce more beneficiaries. They are vital for a very simple reason: you love your family.

As for preparing for your child’s college education, there are variable unit-linked life insurance policies where the plan is designed to grow your premiums in favor of education and retirement planning. Explore your options.
Take into consideration looking for other ways of generating income as well. As they say, do not put all your eggs in one basket. Establish your own business outside employment via direct selling, network marketing, consulting, freelancing and other ways to make money via products or services.

Stage 3: The Pre-Retirement Years

It is ideal for you to have already accomplished certain things in your life by the time you are in your pre-retirement years. You don’t want to extend your time working as an employee after retirement only so you can keep up with the remaining obligations that you failed to complete before you even retired. Here’s a simple list below:

  1. First off, you should already be on your way to getting done with paying off your mortgage and other debts.
  2. You must be confident that you have enough money to send your kids to college without having to apply for additional loans. This may only strain you in your retirement years if you will still have to pay student loans.
  3. You must also begin reviewing your options for reducing your taxes at retirement. Most income sources in retirement are taxed. You need to minimize your taxes so you can maximize your assets, and also ensure that you have a good plan that will sustain you for 20 or so years after retirement.
  4. This is also a good time for you to start a business if you haven’t done so prior. Even when you have already set aside some cash to last you for 20 years, take into account inflation, and the idea of still doing something productive after retirement. This way you are able to continue growing your savings through your business or potential services that you can provide.
  5. This is also the stage when planning for retirement becomes more serious. Look into your portfolio and see whether or not you are on the right track. If there are discrepancies between your plan and the situation, you can immediately look for solutions.

Stage 4: Early Retirement Years

Are you now in your early retirement years?

First, have a clear idea about your potential expenses during retirement. How much will you be spending monthly now that you are at a whole different point in your life?

Second, it is crucial to update your will and evaluate your estate plan! You want to leave a great legacy to your family, right? After having spent 20 to 40 years growing your wealth, you will need to look for wise ways to leave your family with a big estate.

Next, strategically turn your retirement and pension savings into income. With that also comes ensuring that you avoid the tax paid at retirement. With the help of a financial planner, you will learn that there are strategies to reduce the tax friction that comes with most retirement benefits. Be aware of which accounts you have to withdraw from first to ensure that you will not be wrestling with authorities due to tax liabilities. The objective here is to ensure that your savings will last longer.

Stage 5: Later Retirement Years

During the later retirement years, continue optimizing taxes. Do you think it can help you further if you get rid of some of your assets by selling them, instead of making large withdrawals from your retirement accounts that might be subject to tax? This is only one example you can ponder on just so you can limit your overall tax liability in your later retirement years.

Family Retirement

Remember that tax brackets matter. Larger withdrawals can take you to a high tax bracket. Also, be aware of the tax formula of your social security benefits. Up to 85% of these benefits can be subject to taxation.

Of course, update your estate plan regularly every time you get rid of or buy new assets. How you want your estate to be handled when you are out of the picture depends on your will.

You might also want to consider putting yourself into assisted living later on. Explore the options, and see where you can retire at the right place for the right price.

Final Thoughts

No one should postpone planning for retirement. What have you observed in this article? It is in almost every stage that one must think about retirement. Whether you are new or seasoned in the workforce, planning for retirement is always the best way to ensure that your income and your family are well-protected no matter if you die young or you reach old age.

In each life stage, it is always the best decision to accomplish goals that not too many people keep in mind. To be different is to be best in many circumstances and to take these life stages seriously.

All the best to you!