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You’ll be flabbergasted to know that 34 percent of Americans (that is, above 100 million people) have no or $0 savings registered to their name. Can you imagine how stressful that would be?
Additionally, 72 percent of families don’t have a financial plan on paper. Doesn’t it sound weird to you?
There comes the role of financial life cycle and financial planning, which allows you to save and invest according to different stages of life.
What is the Financial Life Cycle?
The life cycle in financial planning is the process of identifying and managing financial needs and challenges that come with distinct financial life stages, from childhood to retirement age.
By understanding and preparing for the different stages of life cycle planning, customers will get a precise vision of making the right decisions that work towards a financially secure future.
There are five stages of the financial life cycle, which are as follows:
- Teenage (13-17 years)
- Young Adulthood (18-25 years)
- Starting a Family (26-45 years)
- Planning to Retirement (45-64 years), and
- Successful Retirement (65+ years)
5 Stages of the Financial Life Cycle
The financial life cycle is divided into five stages of life based on age. Each stage specifies the limit age according to which you need to plan your financial budget. Let’s discuss these financial life stages:
1. Teenage (13-17 years)
The teenage financial life cycle is a stage where teenagers start learning how to manage money and plan their spending. These initial financial life stages are usually spent learning the money basics, completing high school, and getting ready for higher education and future employment.
While teenagers may not be capable enough to make crucial decisions at this stage, they learn some important things.
How do you plan it?
The best financial advice for teens at this stage is to discover what they can achieve with the money. They ask questions like, “I want it, but can I afford it?” And how long and how much do I need to save for this?” These questions are necessary to understand the whys and hows of essential savings and budgeting.
2. Young Adulthood (18-25 years)
The next stage in financial life cycle planning is to earn and maintain financial independence while pursuing higher education, which may involve a professional certification or a university degree while working and creating credit.
Young adults have more financial responsibility and independence than teenagers. Depending on the person, this can be the inception of their wealth accumulation stage, where they start contemplating their financial planning, such as growing their investment portfolio.
How do you plan it?
Financial planning for young adults is similar to completing a trade school course or getting an associate’s degree. It sounds like a more financially and practical choice for some than incurring crucial debt.
The major goal of this life stage is to stand out from other job aspirants and acquire in-demand and valuable skills that only sometimes require obtaining a bachelor’s degree. Thus, young adults must look for various opportunities to save and increase their investment portfolio. One of the safe and good options for this age is SIP. You can start investing systematically every month and as your income increases you can increase the installment amount as well. You can check out the return on mutual fund investment with SIP Calculator.
3. Starting a Family (26-45 years)
Starting a family is one of the crucial financial life stages. Whether your goal is getting married and sharing a home with your spouse or a house full of kids, the central part of this stage is preparing yourself for the financial liabilities of starting a family.
When someone starts a family or cares for them, they take on more responsibilities. Most of the responsibilities can be shared amongst the family, while some require them to take care of themselves.
How do you plan it?
Financial planning for family at this stage is like icing on the cake if they want to increase their investment portfolio further. They would search for several ways to better manage their investments, seek out financial services, and reevaluate their investment strategies.
Furthermore, they may consider buying insurance to safeguard their families, such as auto, home, health, and life insurance. Financial planning is good at this stage of life as you enter into the world of taking on new responsibilities.
4. Planning to Retirement (45-64 years)
As the financial life cycle grows, retirement planning becomes essential as it helps them achieve their retirement goals and prepare them for a secure financial future. As they enter into the retirement stage, children move out from this stage, making it easier for them to save money as compared to the family stage.
Retirement planning starts when an individual gets free from family obligations like child education and marriage. Late planning does not mean they will fail to plan for their Retirement. However, if they are a more concerned adult in their family, early retirement planning is all they need.
How do you plan it?
Financial planning for Retirement requires many considerations, the most essential of which are saving, investing, and accumulating wealth. Customers must focus on saving a lot of money that could be a cushion for them during Retirement.
This may include contributing to a retirement account, both Traditional and Roth 401(k) or IRA, and seeking other investment options. They should also consider their healthcare needs and ways to recover from them during Retirement. Looking into various insurance options or long-term care can be a great move.
5. Successful Retirement (65+ years)
Successful Retirement is the last financial life cycle stage. It is the calmest stage in financial life cycle planning, and after what you’ve shown, they have finally reached the stage to enjoy a successful Retirement!
For many, this stage is about reaping the benefits of all the savings and investments they have made in their early stages of retirement planning.
Retirees may depend entirely on retirement income, including savings and social security. They must carefully manage their finances while enjoying their freedom since this could clearly indicate that their money is only moving in one direction.
How do you plan it?
Successful Retirement requires prior and advanced planning at the early stage of the financial life cycle (during retirement planning) to take advantage of various savings and investments. It sounds amazing to enjoy Retirement by simply sitting on the couch!
End Note
If you want to live a peaceful and happy retirement life, you should not stop or postpone financial life cycle planning and should not ignore the five financial life stages.
Retirement planning is the best way to ensure that you and your family are well-protected regardless of your untimed death. Nevertheless, Betterment, Stash, and Fidelity can help you improve your retirement score. So, kickstart your financial planning with them and avoid the after-retirement stress!
Happy Investing!
Also, you’d like to read this blog – How to Build and Save for Emergency Fund?
Frequently Asked Question
Why is it important to start financial planning in your teenage years?
Starting financial planning in the teenage years is crucial as it helps develop essential money management skills, such as saving and budgeting, which form the foundation for future financial decisions. Teens learn to manage their finances early, preparing them for more significant responsibilities in later stages. By starting early, they can build a habit of prudent financial behavior, ensuring stability and success throughout their financial life cycle. This early start allows for better preparation and informed decision-making, which can significantly impact their financial security in adulthood and beyond.
How can young adults effectively manage student loan debt while saving for the future?
Young adults should prioritize paying off high-interest debt first, using income-driven repayment plans or refinancing options for student loans. Simultaneously, they should allocate a portion of their income to savings to balance debt repayment with future financial goals. Establishing an emergency fund and contributing to retirement accounts, even with modest amounts, can provide financial security. These steps help young adults navigate their financial life cycle by ensuring they are not overwhelmed by debt while still building a foundation for future financial stability and growth.
What are the key considerations when planning to start a family?
When planning to start a family, it is essential to budget for increased expenses like childcare, education, and housing. Purchasing adequate insurance (health, life, and disability) is crucial to protect against unforeseen circumstances. Adjusting investment strategies to accommodate new financial responsibilities is also important. This stage of the financial life cycle involves significant financial commitments, making thorough planning vital for maintaining financial stability. By preparing for these expenses and adjusting their financial plan, individuals can ensure they meet their family’s needs while continuing to build their financial security.
When should individuals start planning for retirement, and what steps should they take?
Individuals should begin retirement planning in early adulthood by contributing to retirement accounts like 401(k)s or IRAs. Maximizing employer matches and diversifying investments are crucial steps. Regularly reviewing and adjusting retirement goals as one progresses through different stages of the financial life cycle ensures that plans remain aligned with current circumstances and future needs. Early and consistent retirement planning helps in accumulating sufficient funds, providing financial security, and reducing the stress associated with retirement readiness, ensuring a comfortable and financially stable retirement.
How can mid-career individuals balance saving for their children’s education and their retirement?
Mid-career individuals should prioritize retirement savings while also saving for their children’s education using 529 plans or other education-specific accounts. Creating a clear budget helps in allocating resources strategically. It’s crucial to balance short-term and long-term goals by ensuring that retirement savings are not compromised. This stage of the financial life cycle involves juggling multiple financial responsibilities, so a well-thought-out financial plan that adapts to changing circumstances is essential. By maintaining a balance between these priorities, individuals can secure their financial future and provide for their children’s educational needs.
What strategies can retirees use to ensure their savings last throughout retirement?
Retirees should adopt a sustainable withdrawal strategy, typically following the 4% rule, to ensure their savings last. Regularly reviewing and adjusting the investment portfolio to balance risk and return is crucial. Planning for healthcare costs, which tend to increase with age, is essential to avoid depleting resources. This stage of the financial life cycle focuses on preserving wealth while managing expenses. Retirees should also consider tax-efficient withdrawal strategies and updating their estate plans to ensure financial stability and security throughout their retirement years, allowing them to enjoy their retirement without financial worries.
