Everyone’s financial situation is unique. And any financial advice you receive should be tailored for your specific needs and goals. While no two financial plans should be the same, there are certain financial issues that each of us should focus on at different stages in our lives.
Stage 1: Foundation Years
During the first few years out of college you should focus on developing good financial habits. Make sure to live within your means and avoid consumer debt that can hurt you for years. During this stage you should also establish a cash reserve for emergencies and future investment opportunities. And once you’ve gotten your budgeting and cash serve under control, start to build your long-term investment assets through an employer-sponsored retirement plan or IRA.
Stage 2: Accumulation Years
The next stage involves accumulating assets for large financial goals like college education for your children and retirement. Obviously this process starts slowly but ramps up as you reach the peak of your earning potential and your children leave home. In addition to “how much” to save, you should also focus on “where” to save. Most individuals should have a combination of different types of investment accounts, including tax-deferred accounts like 401(k)s and 403(b)s, tax-free investment accounts like Roth IRAs and Roth 401(k)s, as well as non-qualified (i.e., taxable) investment accounts.
Stage 3: Pre-Retirement Years
During the 5 to 10 years before retirement you should tighten up your retirement plan, make sure you’re saving enough, and start to get an idea of how you’ll make the switch from accumulating a nest egg to living off of that money in retirement. These years are very important because people are generally at the top of their earning potential and can make up for getting a late start if they plan accordingly. During this stage do-it-yourself investors should get a second opinion from a professional if they haven’t done so already since waiting until retirement won’t give them time to fix past mistakes or take advantage of opportunities that they might not know exist.
Stage 4: Retirement Years
One of the biggest mistakes I see people making during their retirement years is being too conservative with their investments and forget they might have another 30+ years of inflation to deal with in retirement. During this stage you want to have a strategy in place that will give you the secure income you want as well as the growth potential you’ll need to keep up with inflation over time. This is especially true for individuals that receive some or most of their retirement income from pensions without guaranteed cost of living adjustments!