Financial Planning For the Times of Your Life
As your life evolves your financial needs change, but you always need a plan that sets the stage for building wealth by mid-life.
The need for financial planning really sets in when you get your first adult job. Sure, as a child your parents (hopefully) taught you how to save, spend and share money, and you may have saved for college. But when you start getting regular paychecks, you need to plan what to do with them.
Ages 20 – 30: the foundation years
In your twenties, you typically don’t have a lot of expenses relative to later years—you may be renting, you likely don’t have kids yet, you may have an auto loan or student loans to pay off. “At this stage you need to lay a good foundation of financial planning,” says Anne Fink, CFP, vice president of wealth management at Johnson Bank. “You should develop and follow a budget and participate in your employer’s retirement plans and insurance options, if they’re offered.”
It’s a good idea to work with a financial planner at this stage, whether it’s an independent one or someone at your financial institution, to figure out how much you should be saving and investing. Make sure you choose a CFP, or certified financial planner, advises Fink, “CFPs are required to meet significant education and experience requirements in addition to adhering to a strict code of ethics.”
30 – 40: the spending years
In this decade expenses usually ratchet up. You may have kids, a home, and assorted possessions to pay for. “It can be a challenge for people to manage financially, but they should continue adjusting their budgets and try not to cut contributions to their retirement plans,” Fink says.
As soon as children enter the picture, it’s critical to establish an estate plan, to determine who would take care of your children if you died and to ensure your assets would pass to them as you wished. “This is the time when life is most hectic. It isn’t always something you want to think about, but it’s a critical piece of your financial plan,” says Fink. You’ll want to work with an attorney who specializes in estate planning, and be prepared to adjust your plan periodically.
40 – 50: the wealth accumulation years
At this stage the nature of your expenses usually changes, and these are typically your peak earning years. “Your kids may be moving into college and you need to look closely at what you’ve accumulated for retirement, whether you’re on track or if you need to make up for lost time,” Fink says.
At this time of life, financial planning needs get even more complex—that’s where experts like those at Johnson Bank can really step in and help. “People have different financial needs at the time they’re accumulating wealth. Once they’ve established a base portfolio they need to be more structured with their planning,” explains Fink. “I work with people who have already accumulated wealth to make sure all their investment allocations are correct given this stage of life, and I work closely with their estate planning and tax attorneys so all of our collective advice is consistent.”
She finds that some people have prepared well and have solid plans in place. Others haven’t planned at all and need to play catch-up. She helps them figure out where they are financially and where they want to go, and devises a roadmap to get them there. “We identify areas of priority and work on them one at a time,” she says.
Things you’ll want to have in place at this stage include making maximum contributions to your retirement plans, and having a long-term care insurance policy and an estate plan. “We also look at cash flow,” says Fink. “We may be able to flow excess discretionary income into other investments to round out the portfolio.”
Focus on loans and debt management as well. “If your goal is to retire at age 55 and you have significant debt, you probably won’t get there without a strong focus on debt management,” Fink notes.
50 – 60: the pre-retirement years
In these years, hopefully your expenses have decreased—your house is on the way to being paid off and your kids aren’t living at home. “It’s time to focus on retirement and channel any additional cash into savings,” says Fink.
60+: the retirement years
Although the economy threatens to throw many people’s retirement plans off, most people plan to retire sometime in their sixties. “One of the real challenges clients face during this time is determining how the costs of health care will impact their monthly budgets,” Fink says. “You have to be very diligent with your investment portfolio and continue to meet with your financial advisor to ensure you won’t outlive your retirement savings.”
It takes time to make financial plans, but without that roadmap, you may not meet your goals. As one book title says, “If you don’t know where you’re going, you’ll probably end up somewhere else.”