Financial Stages of Life

The Balancing Act of a Lifetime

You’ve just landed your first job and your bank account is slowly starting to grow. Or perhaps, you’re at an advanced stage in your career, your savings are ‘not too bad’ and you’re looking forward to retirement, or maybe you’re already there!

Although circumstances may differ, most persons follow the same general path throughout their lifetime. They build skills through education, embark on a career (or two), purchase a new house or car, start families, transition into retirement, and finally, transfer wealth to future generations. It’s a little unsettling to sum up an entire lifetime into one sentence, but it gives some much needed perspective when trying to effectively manage your income to achieve your life’s goals.

The bottom line is that regardless of your age, you probably feel that your income is insufficient and are faced with the all-too-familiar dilemma of living life in the now vs. saving for your future. However, with some discipline it is possible to find the right balance. You can enjoy your life in the present and still meet your future goals by managing your finances and creating an investment portfolio with the right combination of assets (stocks, bonds, mutual funds, etc.) for you. But how do you know what the ‘right’ portfolio is?

The simple answer is that there is no static ‘right ’portfolio. Instead, your ‘right ’or optimal portfolio evolves based on your stage of life and unique circumstances. To better understand the idea, we divide an adult’s lifetime into four periods that roughly reflect an individual’s financial stages of life:

Early career (Age 18-35)–Under ideal conditions, you’d invest as much as you can at the earliest stage of your career to benefit from compounding interest over a long period of time. However, in reality, it’s not that simple. At this stage, your salary may be low, your savings minimal and you may have competing priorities. For shorter-term goals, such as saving to buy a car or house, you’d want to take on less risk and have more liquidity in your investments.
It may be hard to think about long term goals here, but you need to consider that at this stage, your ability to tolerate risk is high. You have a long investment horizon, which means you have time to make up for any potential losses you may experience early on. Also, there are fewer financial obligations (e.g. mortgage, dependents), allowing you flexibility with regards to short-term portfolio risk. As such, your optimal portfolio should have a higher allocation to more risky assets such as stocks, and a lower allocation to less risky assets such as bonds.
Career development (Age 35-50)–This phase is often where you experience upward career mobility and income growth. At this point, if you’re married and have kids, you may be working towards funding your children’s education. You should also start focusing on more long-term goals such as planning for retirement with annuities and protecting your family with adequate insurance coverage. As your income grows together with your household expenses, you have higher liquidity needs and your investment horizon is shorter than before. Your portfolio should be restructured to accommodate these changing priorities by increasing your allocation toward lower risk investments and reducing your initial allocation to high-risk assets.
Peak accumulation and pre-retirement (Age 51-60)–At this point, most people either have reached or are moving toward maximum earnings. You should evaluate your progress thus far to determine whether you’re on track to meet your retirement goals or not. If you’re not, you may need to extend your retirement date, reduce your spending or adjust your portfolio strategy accordingly. Many people in this phase continue to restructure their portfolios to reduce risk and may consider investments that are less volatile. The reason for this reduction in risk is to safeguard your retirement funds from large dips in asset prices.
Retirement–Finally, you’ve made it and if you’ve maintained your discipline throughout the earlier years, you should have sufficient assets to meet living expenses and be able to comfortably enjoy the wealth you’ve accumulated. If you haven’t, it’s still not too late to start. You should note that the need for asset growth does not end here. For many households, the length of retirement could exceed 20 years; and given this potential horizon, it is important to continue taking an appropriate level of investment risk. After the initial 10 years of retirement, the ‘late retirement phase’ becomes especially unpredictable. This risk of outliving your funds (longevity risk) can be mitigated through the use of annuities.
Overall, life can be unpredictable to say the least. That’s why at every stage, it’s important to have a cash reserve in a money market fund or traditional savings account to provide liquidity for emergencies.

To sum up, there’s no ‘one size fits all’ when it comes to investing. The general rule is that as you age, you should reduce exposure to risky investments (stocks) and increase exposure to less risky investments (bonds) based on your investment horizon and unique goals.

Remember, it’s never too late (or early) to create or rebalance your investment portfolio. In fact, the earlier you do, the easier it is to transition from one stage to the next. Another good idea is to schedule annual reviews of your investments with a financial advisor. This will keep you up to date on your investments and help make necessary shifts in your investment strategy.

Now, you’re one step closer to finding your ‘balance’.

The Balancing Act of a Lifetime

By:

Analise Ali

Products and Services

Resources

Contact