What is Life-Cycle Planning?
There are many focus areas within financial planning, including insurance, investments, tax planning, retirement planning, estate planning, etc. My reason for pursuing a graduate certificate in financial planning is retirement planning, which has become a passion of mine. One of the first concepts I was exposed to during the program is called Life-Cycle Planning, and I thought you might find this topic as interesting as I did.
1. The Early Years (ages 18-26)
An individual’s main financial focus in their early years is handling their consumption needs. They should use a budget to balance these needs and be paying down student and auto loans they’ve accumulated. From a risk management perspective, they should consider disability insurance and will soon be getting off their parent’s health insurance (in the US), so they will be interested in those options as well. An emergency fund should be in place before they enter the family formation time period. I would also anticipate an interest in retirement planning from a subset of this group.
2. Family Formation Years (ages 27-35)
During this stage, budgeting and managing consumption take a front seat as couples get married and have children. Many will purchase homes, so there will be an interest in choosing the right mortgage and then managing that debt load. Parents should add life insurance as well, so the family is taken care of if they pass away prematurely. A couple should certainly be saving for retirement before they leave this life stage (in my opinion).
3. Middle Age (ages 36-49)
In middle age, people shift focus from raising a family to accumulation of wealth as they look towards retirement. They should be saving in earnest and will also need to have a plan for their children’s education expenses. Disability insurance and life insurance should still be in place, as these are still working years.
4. The Golden Years (ages 50-67)
I always thought the “golden years” and “retirement years” were the same thing, but my course content says otherwise. Whatever you call this stage, there is a continued focus on accumulation and preservation of assets. People in this life cycle stage will be working towards paying off their long-term debt, like mortgages. There will be an serious focus on retirement planning, and even estate planning.
5. The Retirement Years (ages 67+)
During our retirement years, we must have a plan in place for income distribution, i.e. how and when to use retirement plans, taxable accounts, and other assets. Distribution planning relies heavily on tax planning as well. Estate planning kicks into high gear during retirement, and people start to consider what their legacy will be. Individuals may want to leave some wealth to family or charity, for example.
Of course, not everyone’s life fits into these neat life-cycle stages. Some people start families sooner, while some may never have children at all. There’s a whole movement (financial independence/retire early or FIRE) that focuses heavily on wealth accumulation and saving during their early careers, so that they can retire in their 40s or even their 30s. From a financial planning perspective, these are more like guidelines than actual rules; they get you thinking in the right direction.
What is your reaction to these 5 life-cycle stages? Do you have anything to add?
Source: Boston University’s Financial Planning Graduate Certificate course, Introduction to Financial Planning, 2019