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The definition of financial independence is “the ability to live from the income of your own resources”.

Article by Akwasi Duodu

How do you plan for the five financial life stages?

Think about who you were five, or even ten years ago. Have your priorities changed in that period? It is important to adapt your financial planning as you go through life and accumulate wealth. In this article, we discuss some things to think about as you go through the various financial life stages.

The earlier you start the financial planning process, the better. This is particularly true when it comes to planning for retirement and investing in a pension. However, each stage of your financial life carries unique opportunities and new things to think about.

What are the different financial life stages?

The different financial life stages discussed in this article are:

  • Young adulthood
  • Middle adulthood
  • Peak earnings
  • Financial independence
  • Decumulation

Let’s take a look at each stage of your financial life in a bit more detail.

Stage 1: Young adulthood

The first stage of your financial journey is young adulthood. This forms part of the accumulation state and would involve contributing to a pension. This is much easier than it was a few years ago because many employers have auto-enrolment schemes.

Don’t get left behind if you are self-employed! If you are concerned about what to do, we recommend seeking professional, pension advice to help you gain clarity on your options.

Staying out of debt and building your savings is crucial in this financial life stage. Getting deep into debt using credit cards and loans is a big no-no. The only acceptable debt would be your student loan. Avoid debt if you can and use your income to build your savings.

Stage 2: Middle adulthood

A lot of people say this is when things start getting serious. Far from it! You can still have fun, but certain decisions could go a long way into determining how fondly you look back at these years. You’ll be looking at getting a mortgage, buying a house and perhaps starting a family.

Set financial goals. Determine when you’d like to quit work and how much you’d like to retire on – and put a plan to work. Make sure you have the right insurances in place to protect you and your family (if you have one) from financial disaster.

By accumulating wealth and having a savings strategy you’ll be better equipped for the many unpredictable events that happen in these years. Build your savings reserves invest for the long term and reject non-mortgage debt.

How do you do this?

There are lots of resources online, however, if you are time-poor, you could seek to form a relationship with a financial planning adviser.

Stage 3: Peak earnings

This is still the accumulation stage and where you really should be directing as much as possible into tax-efficient savings plans such as pensions and ISAs. If you are currently asking yourself whether you should pay into a pension or an ISA and are unsure, find a local financial adviser and ask for advice.

Insuring your income should also be a priority ensuring you’re building your castle on solid foundations. As you get older, you may want to reconsider the risk level of your investments. At this stage, you would have less time to recover from potential market falls than you would at stage 1 or 2, so diversifying would make sense.

Related reading: The benefits of the Lifetime ISA

Stage 4: Financial independence

This is a financial life stage that so many of us dream of. The definition of financial independence is “the ability to live from the income of your own resources”. When this happens, you experience freedom of time and freedom of money.

If you’ve applied yourself well in the previous life stages, you should be able to do all the things you want with money no longer being a worry. To maintain finacial independence, it’s so important to focus on preserving your wealth assets and property as it’s these resources, along with a pension that may provide you the freedom you’re looking for.

Stage 5: Decumulation

How quickly life sweeps by! With your mortgage paid off, the kids grown up and gone and just yourselves to think about, it might be time to consider downsizing and sharing some of your wealth and wisdom with the next generation.

Decumulation is the point where you start taking income from your investments and pensions. During this financial life stage, you may consider your inheritance tax position and make gifts to the next generation.

Make sure your Will reflects your wishes. Most importantly, enjoy your hard-earned wealth – don’t be embarrassed to spend it! You’ve earned it and certainly can’t take it with you!

How to plan for the five financial life stages – summary

So, that’s it – our short concise guide on how to plan for the five finacial life stages.

As discussed, each stage of your financial life requires different tactics, considerations, and actions. When you are young it’s about being careful with money and having an eye on later life. The older you get the focus is switched to accumulating assets and accelerating the journey to financial freedom.

Article FAQs

Please find below some questions and answers covering the topics raised in this article.

What are the financial life stages?

The financial life stages are grouped into five key phases: early adulthood, middle adulthood, peak earnings, approaching retirement (financial independence), and post-retirement (decumulation). Each financial life stage requires focusing on different financial priorities, from setting up a pension, buying a house, and having children, to wealth accumulation and retirement planning.

What decisions should I make as I move through the five financial life stages?

As you progress through each financial life stage, your focus should shift from establishing financial stability to saving for major life events building wealth, planning for retirement, and finally, managing retirement income, estate and tax planning. Each stage requires a different focus and set of activities to help you along your financial life journey.

What are the key considerations when accumulating wealth?

Accumulating wealth involves saving consistently, investing wisely, managing risk, and planning for both short-term and long-term financial goals. Consider diversifying investments and continuously reviewing your financial plan to adjust for life changes and economic conditions. The earlier you start accumulating wealth, the more you could benefit from compound interest and investment growth

If I haven’t set up a pension in young adulthood, can this impact my retirement?

Delaying pension setup can impact your retirement by reducing the time your investments have to grow. Starting late may require higher contributions to meet retirement goals, but strategic planning can still help secure a comfortable retirement. If you are worried, you can always talk to an experienced retirement planner or pension adviser. They can help you set up a pension, and plan for retirement.

I’ve just started my financial plan, what process should I follow?

Begin with assessing your current financial situation, set clear short-term and long-term goals, create a budget, establish an emergency fund, and start saving for retirement. Also, consider how you feel about risk. Regularly review and adjust your plan to stay on track toward achieving your financial objectives. Furthermore, consider taking out protection policies such as life insurance, critical illness cover, and income protection.

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