Financial-planning strategies by life stages
The financial issues we face throughout our lifetimes are unique based upon where we are in life.
In this primer, we will attempt to address what typical individuals at various stages in life should focus on. We will segregate these stages in life as follows: mid 20s to early 30s, mid 30s to early 40s, mid 40s to early 50s, mid 50s and beyond. We will also focus our discussion on insurance and investments, while briefly touching estate, income tax and educational funding issues.
First up are the mid 20s to early 30s. At this stage in life, typical individuals are getting their careers and families under way. With families come responsibilities and with careers come benefits. With regard to families, the first issue to be addressed should be insurance coverage. This means disability insurance as well as life insurance.
Individuals must ask themselves, "if I were to die or become disabled, would those that depend upon me financially be able to maintain the lifestyles to which they have become accustomed?" If the answer is no, then coverage for each of these situations must be addressed. Coverage should be sufficient to produce the annual income needed to maintain lifestyles. In the event of death, a good rule of thumb would be to take the amount of income needed and divide it by a conservative rate of return such as 6% (i.e. $50,000 / 6% = $833,333). In this example if an individual already had saved $200,000, the amount of coverage needed would be $633,333.
In many cases, employers will provide disability and life insurance. These are both excellent benefits if you become disabled or deceased while being employed by this employer. However, if you leave your job and have become uninsurable, you run the risk of not being able to get the coverage needed. This is why securing coverage outside your employer's benefit program is often advantageous. In many cases, employers will provide disavility and life insurance.
With regard to investments, individuals typically will be investing with long-term horizons and thus have the ability to weather the short-term volatility the market often displays. Individuals should focus on maximizing their retirement contributions and allocating them appropriately. Currently individuals are allowed to contribute $10,500 to their employer-sponsored retirement plan. Next year this amount increases to $11,000. Employers often match contributions. Employees...