Join Ken Boyd for an in-depth discussion in this video Mapping to life stages, part of Setting Your Financial Goals.
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- As you move through life, your financial planning focus will change. A young person in their twenties may have the goal of saving for their first home. An executive in their fifties is more focused on planning for retirement. If you begin to think about your financial timeline in terms of life stages, you'll have a more complete picture of the financial planning you'll need to do over your lifetime. The first stage we'll discuss is starting career year years. This stage is defined as people in their early twenties to about 30 years old. During career years, many people graduate from college.
Regardless of your schooling, everyone starts a career of some sort during this period of life. In this stage, you'll need to establish an emergency fund, saving for a rainy day. If you have an unexpected car repair or medical bill, you can access the emergency fund. Since we face these problems throughout life, maintaining an emergency fund will be part of every stage in your life. This early stage is the point where everyone needs to get insurance in place. Medical insurance needs to be a top priority.
Many young people are reluctant to get medical coverage because they are generally healthy in this age range. Everyone, however, should at least have catastrophic medical coverage. If you live in the United States, this is now law. This type of policy covers large medical costs due to serious illness or injury. It doesn't include coverage for getting the flu, only for serious medical issues. Young people should consider life insurance if they marry or decide to have children.
If they work to financially support a household, life insurance can help replace income in case of death. A life insurance death benefit can provide a lump of sum of assets can be invested. The invested dollars can generate an income stream to help support a spouse or children, should the insured person pass away. Finally, the starting career years life stage is the time frame to start saving for a house. Depending on careers, this saving process can take many years.
People starting their careers, by definition, make less money than more experienced workers. Ideally, people in their twenties should set a goal of saving a certain percentage of their income for a home and stick to that plan. The next stage we'll discuss is called middle age. This generally includes people in their thirties and forties. This stage often creates the biggest financial burdens. In this life stage, people continue to pay down home mortgages. People in this age range are more likely to decide to have children and incur the costs of raising kids.
That cost may include borrowing to buy a bigger home. Middle aged people should consider increasing the dollars they're investing for retirement. Finally, people in this age range need to set up a will. A will provides some directions on how assets should be distributed to your heirs at the time of death. The next life stage is the peak earnings stage, the years that you make the most money. This is generally considered to be between the age of 50 and your early sixties.
During this stage, you operate with many years of experience. You also may be managing a number of people at this point in your career. Beyond the early sixties, many people begin to retire or at least slow down. Retirement is getting closer for this group, so they should take a hard look at what the next stage of life might look like. For example, will you retire completely, or continue part time work? The decision to work is connected to the status of your retirement account.
In this life stage, you need to plan the final years of investing for retirement. Get some financial help to forecast the amount of income your retirement assets will generate. Add in other retirement income such as Social Security payments. If your income level is less than you planned, you may need to continue working full time or part time into your sixties. Finally, you reach the retirement stage. There's a practical question to be asked here. What will you do during retirement? In the peak earnings stage, you considered part time work in retirement.
In addition to part time work, will you travel or maybe pursue hobbies? Financially, this is the time to decide how to take dollars out of your investments to fund retirement. How much will you take out each year and how often? Consult with a tax professional on the tax impact of taking retirement distributions to fund your retirement. Take a look at your will periodically to see if the language in the will still reflects your intentions. Now that you've learned more about these life stages, add them to your timeline.
The timeline can be found in the exercise files for this course. If you're 25 years old, you'll start with the starting career years and move forward. If you're 45, the next step on your timeline will be the peak earnings years. Whatever your age, the timeline will help you consider different planning issues at different stages of your life.