Oran A. Hall | The seasons of life and their financial imperatives
There are several life phases through which we generally pass, and people passing through each stage tend to have similar experiences. Not everybody necessarily passes through all the stages, and not everybody is affected in the same way or responds in the same way to these experiences.
Our discussion will focus on the seasons of life, starting with early adulthood at about the time that the young adult leaves the family home. Some young adults leave to study, others leave just to establish independence at about the time when they begin to work, and others leave to start their own family.
The first season is flying solo when young adults go out on their own. At this stage, some are likely to have student-loan obligations and may be focused on acquiring assets of their own, perhaps using debt to do so.
Still not yet established in the working world, they are not likely to be earning a strong income, but there are exceptions. Proper money management is important at this stage, and saving and investing should be priorities.
The next stage for some is a serious life-changing experience: marriage. In this season, the focus shifts from one person to two – two debts, quite likely, two bank accounts, two emerging investment portfolios, two sets of goals, two outlooks on life, two family cultures, two budgets, two attitudes to money, two sets of values, just to mention some.
So the challenge is to merge these two’s into one as a new family unit is formed. What will the couple do jointly and what individually? Yet, they must accumulate for the future. This transition can be made easier if the parties discuss these matters and agree before getting married.
At some point for most couples, the focus shifts from two to more as they become parents. New expenses emerge to take care of the following: education of the children; childcare; life, health, and disability insurance to ensure the young dependents are not left exposed and unprotected. Some expenses increase – food, for example – and an emergency fund assumes greater importance. There must be savings, and there should be an estate plan.
And should there be a plan just in case, for whatever reason, one parent drops out of the picture? This can be quite a long season considering the time it takes for children to reach the point of flying solo.
The good part for parents is that they should be able to grow professionally and be better able to provide for their families, recognising at the same time that they could experience several job transitions, which can be quite upsetting but sometimes very rewarding. Up to this point, parents should still be accumulating resources, investing wisely and preparing for retirement.
For most parents, the next season is the empty nest, by which time the children would have left home to be on their own. This period would generally correspond with the pre-retirement years. So expenses should be lower than in the previous season and income should be higher, creating scope to save more but being cautious that financial resources are managed more conservatively in this period of consolidation. Life in this season can be more comfortable if there was serious planning with effective execution in the earlier seasons.
The next season – the golden years – is the period of retirement, and how golden it is, as measured by the financial independence the retiree enjoys, depends heavily on the strategies put in place and executed in the previous seasons. This can be a long season considering the increase in life expectancy, and although advances in healthcare have led to people enjoying better health, it is still true that many experience serious and costly health challenges. For some, this is a period of long-term care, which costs. This does not have to be a period of inactivity as there can be opportunities to get involved in charitable activities and new hobbies, some of which can be income-generating. Depending on the level of residual assets and the quality of estate planning, resources can be left to add gold to younger family members.
In most cases, one partner dies before the other, the widowed one thus being generally left alone. When this season occurs during the working years, the level of income available can be affected by the level of life insurance coverage, employee benefits, investments, and savings. It is imperative to have all important records and documents secured, but accessible, to facilitate easy access to these benefits.
When effective financial planning leads to residual assets being available for distribution to the next generation/s, depending on the season during which the benefit is distributed, the beneficiaries are able to realise a boost to their financial position which, with prudent planning and management, can be of benefit to them in more than one season and to their heirs as well.
- Oran A. Hall, the principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. Email firstname.lastname@example.org