Planning for your financial life stages
Your finances are in a constant state of change. Not only do financial markets fluctuate, but your financial needs also change over time. Luckily, it's easier to predict the changes in your financial life stages than it is to predict the direction of the markets.
Most people pass through three primary financial life stages as they age. Income levels, spending patterns, and family situations, while not exactly predictable, tend to follow a pattern.
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Stage one: building a financial foundation
Young adults face the task of learning how to manage spending and saving within the constraints of their income levels. Developing sound financial habits is critical. Here are some issues to consider.
- Track your spending habits to identify ways to save. Prepare a household budget.
- Set aside 3-6 months of expenses as emergency reserves in a savings account. These funds can protect you, and your credit rating, against unforeseen events such as a large car repair bill or loss of employment.
- Use a wise borrowing strategy. Borrow for things that provide long-term value. Control the use of credit cards.
- Establish a saving pattern. Consider an automatic savings program so that some amount is deposited into a savings account each paycheck.
- Set some savings goals. Whether you want to accumulate a down payment for a home, pay for a car or vacation, connecting a tangible goal with your saving can provide the motivation and discipline you need to save.
- Make sure you have adequate insurance coverage to protect your family and assets.
- Take advantage of employee benefit plans at work.
Stage two: during your prime earning years
This is often a time when your income is rising as well as expenses. Nicer homes, nicer cars and children can easily consume your increasing income. This is also the time when the financial decisions you make will have the greatest impact on the financial lifestyle you will enjoy during retirement. By now, you should have developed some savings and the expertise to make sound choices.
- Start early to save for children's college expenses. Consider using Section 529 Plans or Coverdell Education Savings Accounts (Education IRAs) to get additional tax advantages with the college funds.
- Take full advantage of employer offered retirement plans. If you have a 401(k) plan available, contribute as much as you can or at least enough to get the full employer matching contribution. Consider starting a Roth IRA account to provide for tax free withdrawals in retirement.
- Invest wisely. Consider an asset allocation strategy that matches your time horizon and risk tolerance. Don't ignore the potential long-term returns of equities, but do your homework and talk with a qualified advisor.
- Be sure your insurance protection has kept pace with your needs. Having adequate life insurance to protect your family, in case of your untimely death, is critical.
- Prepare an estate plan to minimize taxes and to ensure that your custodial, financial and medical wishes are carried out.
Stage three: nearing or during retirement
These years can and should be some of the most enjoyable and fulfilling times of your life. If children and grandchildren are part of your life, having the financial ability to help them can be rewarding. A successful career, the freedom to live the lifestyle of choice and a sense of satisfaction with what you have accomplished can make your "golden" years truly enjoyable. However, there are still financial issues that should be addressed.
- Be sure your medical insurance is adequate. The costs of medical care continue to rise and we are living longer. Medicare, Medicaid and private health insurance will all be important.
- Consider purchasing a Long-Term Care insurance policy to protect your hard earned retirement savings.
- Be sure your estate plan is up to date. Changes in your financial situation, moving to a different house or state and changes in your family should all be triggers for reviewing your estate plan with a qualified estate planning attorney.
- Continue to manage your investments carefully. If you are using an advisor or stockbroker, be sure to fully understand their recommendations before accepting them.
- Enjoy your retirement!
We can help
If you'd like to discuss your current financial stage, visit one of our branches or all us at 1-800-288-3425.
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