Investment Through the Decades of Life
- 20s: Key financial concerns are often basic — where to live, where to work, establishing a career, establishing credit. Life-related flux during this period can add significant cost on top of an existing burden of college/graduate/professional school loans. Properly managing and controlling debt and spending is essential because it establishes the basis for future financial stability and credit-worthiness. Personal cash flow is often lowest compared to other decades, so there may be limited ability to dig out from under the pile of bills and loan payments. However, it is crucial to begin regularly investing a portion of current earnings, even if small, toward future needs. It establishes a very important discipline and optimizes the advantage of compounding by having your investment work longer on your behalf.
- 30s: Financial stability often blends with dynamic change. Where to live and where to work may be established for some, but it may involve the purchase of a first home or, for those who started earlier, an upgraded home. The addition of children may involve not only added expense but also a change in ongoing income if either spouse decides to modify his/her career, hence earning capacity. It also introduces the common financial planning prioritization dilemma: “How do I balance setting aside dollars for my children’s education with the very real need for investing for my own future and possible retirement?” Future financial commitments typically out-weigh existing assets, so it’s important to ensure these commitments can be met if existing earnings are interrupted due to death or disability.
- 40s: Investing for retirement becomes a higher priority. Investing in a tax-deferred retirement plan or IRA should begin in earnest if it hasn’t already. Portfolios and/or assets now warrant serious attention. First, the size, complexity, and variety of investments/assets often require ongoing management to optimize return and control risk. Second, higher earned income from successful career/professional/business growth will create tax consequences that also impact investments — thus requiring proper investment planning to assure tax efficiency. Finally, the period of time for a portfolio to recover from a major market downturn before funds are needed for retirement has dramatically shortened. Portfolio autopilot or apathy can have disastrous results. This is also a period when some individuals find themselves “sandwiched” between the competing needs of providing for growing children’s expenses, such as college education, and providing financial support for aging parents or family members. Higher expenses are also the norm: bigger home, mortgage, debt. Planning often requires looking past the question of, “Can I afford it now?” to questions of, “Do I want to be paying for it then?” and “What else might this cost me?”
- 50’s: Often the period of highest individual earning capacity, thus, allocating funds for future needs should be a key priority. It is also when developing a comprehensive retirement plan is most productive. Retirement “what-if” projections should become much more detailed from a financial perspective, with the non-financial concept of exactly “what will retirement be for me” taking the forefront. Perhaps retirement means the possibility of a total shift of career focus, or the reduction of time spent generating income, or the complete flexibility to do whatever whenever. Or perhaps it means no change at all. Focusing on your definition of retirement early in this decade, and the potential financial ramifications thereof allow some time to better meet the resulting financial objectives. In general, the biggest impediment to retirement planning flexibility faced by individuals today is outstanding debt. Controlling and eliminating debt during this period of high earning potential should be high on the prioritization list if flexibility is an important retirement objective. Similarly, significant new financial obligations need to be assessed carefully for future financial impact.
- 60’s: With many individuals choosing to work longer, many of the planning issues outlined in the 50s section can also apply here. Often this is the period when the assets individuals have worked so hard to accumulate throughout their lifetime begin to work for them by generating a supplemental income stream. Consequently, proper portfolio/investment management becomes paramount. Tax planning is integral to this process to assure assets are deployed and used to maximum advantage. One key issue is often deciding what combination of earned income (if any), taxable portfolio earnings and distributions from qualified retirement plans/IRAs is best to meet both current and future cash-flow needs. If not done previously, the need for estate planning in your situation should be assessed by a qualified attorney. Any prior estate planning and resulting documentation should also be thoroughly reviewed and updated by your legal professional. An imperative, but often neglected, step in the process is to properly implement the retitling and realignment of assets as defined by your estate-planning documents.
Observations and insights for savers/investors in their 20s through 60s from E. Jeffrey Roof of Roof Advisory Group, Inc., investment advisory and financial planning services, of Harrisburg