Financial planning is not a one-size-fits-all process; different life stages necessitate varying levels of intervention and prioritisation. As individuals progress through these stages, certain financial planning aspects may become more critical, while others may diminish in urgency or importance. This article explores the various life stages and their impact on one’s financial journey, highlighting how priorities shift and evolve over time.
Single and starting out your career
As you embark on your career and before entering marriage or a long-term partnership, several key financial steps are crucial for establishing long-term success. Your initial pay cheque signifies the beginning of the accumulation phase—an era when your earning capacity allows you to build wealth to support yourself in retirement or when you choose to cease working. Although retirement may not be an immediate concern, this phase is ideal for defining what financial freedom means to you and setting a target for its achievement. If early retirement is a goal, now is an opportune time to create a financial plan to work towards it. Regardless of your retirement timeline, it is financially prudent to capitalise on the tax advantages of contributing to a registered retirement fund. While you might not be able to invest the full tax-deductible limit of 27.5% of your taxable income initially, starting with a manageable amount and gradually increasing your contributions as your financial situation improves is a sensible approach. This strategy ensures that you begin to build your retirement savings effectively, even if you start with smaller, more manageable amounts.
From a risk management standpoint, securing a comprehensive income protection benefit is crucial to safeguard your earnings if you become temporarily or permanently disabled. The disability insurance sector can be complex, and it’s advisable to seek guidance from an independent advisor who can help tailor an income protection plan that aligns with your specific needs, income level, occupation, and risk profile, ensuring you have adequate cover in place. Your future self will benefit from establishing an emergency fund to cover three to six months’ worth of expenses. Without such a fund, you may face the necessity of incurring high-interest debt in emergencies. Open a dedicated savings account for this purpose and gradually build the balance to a comfortable level. Additionally, consider joining a registered medical aid scheme at this stage of life, keeping in mind that there are a number of affordable network options available that accommodate various income levels.
Married or in a permanent relationship
Upon marriage or entering into a long-term relationship, it is essential to reassess your life cover needs to reflect your new circumstances. If you and your spouse have acquired a home, your life cover should ideally match the value of your home loan as a minimum. Additionally, consider making financial provision for each other in the event of death.
Both you and your spouse should update your wills to ensure proper distribution of your assets in the event of death. Additionally, establish a budgeting system for your joint household and determine the management of daily financial affairs. Now is a good time to discuss your joint retirement goals and respective visions for retirement, and to develop a preliminary joint retirement plan. It is important to remember that a retirement plan is not static but rather a flexible framework that should evolve with your changing circumstances. Prioritise maximising the tax efficiency of your retirement investments, as this can significantly impact your long-term financial outcomes. With a longer-term investment horizon, one should ideally focus on growth assets that offer the potential for higher returns over time, enhancing your overall retirement strategy.
Your investment strategy will need to find a workable balance between funding for your retirement while at the same time building a discretionary portfolio that will allow you access to your capital to fund expenses such as a deposit on a house, overseas travel, home renovations, or vehicle purchases.
Your growing family
The arrival of a child necessitates several critical financial planning adjustments. Importantly, it is essential to update your will to ensure that your child is properly provided for in the event of your death. In the case of simultaneous death, appointing a legal guardian for your minor child becomes imperative. Many parents establish a testamentary trust within their wills to protect assets intended for their minor children, managed by nominated trustees until the children are of an age to handle their own affairs.
During the wealth-creation phase, ensuring adequate life cover to support your child if something were to happen to you is vital, and it is likely that you will need to increase your life cover accordingly. Additionally, consider setting up an education fund for your child using a discretionary investment vehicle, such as a collective investment scheme, or a tax-free savings account.
This period, often referred to as the ‘lean years,’ can be financially demanding as you balance home loan repayments, retirement savings, daycare fees, and contributions to your child’s future education – and the adage ‘this too shall pass’ aptly describes this stage. Despite its financial pressures, there will come a time when debts are settled, children are educated, and monthly living expenses decrease significantly – which will enable you to refocus on your retirement funding.
Flying the nest
During the stage of having financially dependent adult children, fine-tuning your retirement plan becomes crucial. As you increase your net worth, reduce home loan debt, and have fewer financial dependants, you may find it possible to reduce your life cover slightly – and the savings from this reduction can be redirected to enhance your retirement funding. Additionally, once your home and vehicles are paid off, the extra cash flow can similarly be allocated towards your retirement savings.
As you accumulate assets, prioritising estate planning and tax structuring becomes essential to ensure your estate is tax-efficient and aligns with your wealth transfer goals. With a more complex estate and no minor children, updating your will to reflect your estate planning objectives will likely be necessary. In addition, as you age, addressing the costs of current and future healthcare becomes increasingly important. You may also want to consider moving onto a more comprehensive medical aid plan, especially if you or your spouse have chronic conditions. Given that healthcare costs typically rise with age and the likelihood of hospitalisation increases, obtaining a gap cover policy becomes increasingly important. If you are still residing in the family home, downsizing to a more manageable property with lock-up-and-go features may offer greater freedom to travel, although this involves careful timing to ensure that you don’t enter a retirement facility too early or leave selling your primary residence until it’s too late.
Planning for formal retirement
Formal retirement involves key decisions, such as determining the timing of your retirement, purchasing an annuity income, selecting an investment strategy, balancing income streams, and setting drawdown levels. This phase signifies the transition from accumulating wealth to drawing from it, making these decisions hugely important.
A significant cost to prepare for in retirement is care, whether frail care, assisted living, or private home nursing – keeping in mind that advance planning is crucial, as many retirement facilities have waiting periods of ten years or more. Now is the time to research, submit applications, and develop detailed retirement cash flow analyses. This ensures that your healthcare plan for old age remains affordable and well-integrated into your overall retirement strategy.
Planning your legacy
As you advance in age, prioritising the proper structuring of your estate and planning for potential physical or mental incapacity is essential. If you have adult children, consider granting them a general power of attorney, particularly if mobility becomes an issue. Many older individuals struggle with technology and may feel isolated when managing their financial affairs. The risk of dementia or mental incapacity increases with age, so it is prudent to take proactive steps while you still have mental clarity. This ensures your assets can be effectively managed on your behalf should your cognitive abilities decline.
Have a super day.
Sue
