Five financial stages in everyone’s life

By Don Ezra, on behalf of Cuffelinks
August 2018

We go through stages in our lives. Sometimes it’s useful to look at how our psychology changes as we move from one stage to another. This article describes five financial stages, looking at minimum, successful and exceptional standards.

I don’t have numerical benchmarks for you. Individual circumstances vary too much for standardised benchmarks. It doesn’t matter whether you’re ahead or behind anyone else, let alone some fictitious benchmark person.

Instead, I’ll give you three very rough action criteria at each stage. One will be the minimum, one will represent success, and one will be exceptional. As you get nearer retirement, the criteria stay the same, but their interpretation changes. What was exceptional in the previous stage now simply represents success, and what represented success now becomes the minimum. Don’t take them as rigid guidelines, they’re meant as hints to you.

And don’t take the dates mentioned in defining the stages too rigidly either. Again, they’re hints. We’re all different.

Stage 1: The family and career years (more than 20 years before planned retirement)

The start of your paid working career is a natural starting point for looking at retirement finances. It’s hardly a priority, though. Typical priorities at this stage relate to family and career. From a personal perspective, you’ll want to establish a residential pattern, whether renting or purchasing, keep fit, enjoy life involving leisure, family and friends.

Nevertheless, minimum retirement-related action steps in this phase are to start saving via compulsory super and register for some form of default investment glide path, if there is one. (I explained about glide paths in an earlier article.) In other words, start early.

Success at this stage involves making additional voluntary contributions and increasing those contributions every time your pay increases.

This isn’t easy. You have so many other financial priorities. And you may be saving indirectly for retirement anyway, via paying down a mortgage, which is another form of increasing your assets.

What’s exceptional? Getting into a post-retirement income mindset by doing funded ratio calculations, and understanding social security and superannuation rules. In the early years of work, it’s completely natural to think solely in terms of accumulating wealth towards retirement. Changing from a wealth mindset to an income mindset typically comes much later.

Stage 2: Consolidating the financial base (5 to 20 years before planned retirement)

Now you’re in the peak earnings phase of your career, and this is when you make the financial transition from paying off debts to accumulating wealth, although your children’s education may make a big claim on your resources. The thing is, if it isn’t now, it may be never.

Your social life is still important, as is keeping fit. If you have time, this is when you are valuable as a mentor to young people, because of the experience you have gained.

Being already in compulsory super, increases in your additional voluntary contributions as your pay increases are now the minimum requirements if you want the gift of a financially independent retirement.

Success? Getting into an income mindset is the only way to identify what you need to do between now and your planned retirement date. Included in what you need to do is a consideration of when you’ll move away from the default investment glide path and customise one for yourself.

Exceptional? That’s when you’re in control of an integrated plan for paying off debt (mortgage and credit cards), financing your children’s education and saving toward retirement.

Stage 3: Reaching maturity (five years approaching retirement)

Now it’s not just a financial priority, it becomes a life priority to establish a plan for graduating from full-time work. There are two parts to the plan, financial and psychological, identifying the lifestyle you’re going to, not just the lifestyle you’re going from.

Social activities and keeping fit are important. Start to identify the experiences that satisfy you and make you happy, and explore ways to give something back to society.

At this stage, the income mindset and maximising retirement contributions are the minimum financial requirement. It’s also time to understand investment risk and set forth on your investment path to retirement, including a customised glide path. You should know exactly how you relate to the age pension.

Success? The mortgage and credit card debt are gone, your children’s education is paid for and you are on target for your retirement financial goal without having to increase contributions. You’re starting to understand longevity, for both you and your partner. And you’re considering what to do about post-retirement healthcare and long-term care.

What’s exceptional? You’re ready to start considering your legacy to your children, or even starting to make it available to them in small amounts now. You’re making arrangements for a part-time career. You’re searching for, or may have found, a financial adviser.

Stage 4: Transition (the first three years of getting into a retirement lifestyle)

Now the priority is to make the transition from full-time work happily, remembering that it’s psychologically a new world, and even if you thought you knew what you’d enjoy doing, reality is often different. This is normal, not something to be surprised by or disappointed about.

Expand the scope of those social activities that create shared experiences, because typically those are the ones that make you happiest. Experiment with many activities and be honest about what really does satisfy you and make you happy.

The minimum toward retirement finances is now to understand the pattern you have chosen (whether an annuity or regular drawdowns) for your income. Make a decision about long-term care. Find a financial professional. Reassess your financial position (including your personal funded ratio) annually, with your spending pattern starting to establish itself. Make a decision about how you’ll deal with longevity risk.

Yes, all of that is the minimum. If not now, when? After all, you’re now already retired, at least partially. Success comes from everything now being on track, with your legacy plans established.

Exceptional? The psychological adjustment is complete, for both you and your partner.

Stage 5: Planning to downsize your lifestyle (around age 75 or a little later)

Downsizing your lifestyle is a typical phase, and it occurs naturally. Getting your financial affairs to match your downsized lifestyle needs to be done consciously. All financial aspects should now be routine and low risk, because that defines your lifestyle too.

I have no criteria for you at this stage. I simply wish you much happiness!


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