Financial Life Phases

Posted by

Investments are vital in a person’s financial life as investing, if done correctly, is a way to make one’s money grow. However, investment objectives and the instruments used to fulfill objectives should alter as one progresses through life. There are four financial life cycle stages in a person’s life and all have a varying degree of risk and return depending on age and objectives:

  1. Accumulation Phase: the accumulation phase of financial life occurs when an individual starts to earn his or her first paychecks. The individual is now accumulating money from their employment. This phase will continue from the first paycheck to the almost the middle of their working career. This phase has a long time horizon. There is also the potential for the individual’s earnings to grow. Due to the long term horizon of this financial life phase, the individual has the ability to invest in significantly high risk. If losses were to occur, the individual is young and has the ability to accrue the losses through other investments through diversification. An individual wants to invest in diverse, moderately risky investments to grow their money with returns. An individual in the accumulation phase has long term goals of purchasing a home and possibly paying for their future child’s college education, and thus needs to grow their money through high risk-high return investments. In addition, retirement savings should be considered
  2. Consolidation Phase: the consolidation phase of financial life occurs after the middle of an individual’s working career. Now, the individual wants to have earnings greater than their expenses. The individual is still working for a significant more number of years, and thus can afford to take on some risk. However, since the individual is not at the beginning of their careers, and most likely have more financial responsibility (i.e. Mortgage payments, children’s college tuition payments, car payments etc.) the individual should not be investing in extremely high risk. An investor in their consolidation phase should look to preserve capital and focus on saving for their retirement.
  3. Spending Phase: the spending phase of life begins at retirement. Most of one’s living expenses are covered by pension plans and income from early, long-term investments made during a prior stage of financial cycle. An individual in this phase wants to have less risky investments than the consolidation phase in order to not face significant loss during retirement. However, the spending phase should consider inflation and take on minimal risk for security if inflation increases. Therefore, an individual in the sending phase can invest in some well-known, secure common stocks like AAPL or AMZN or government bonds. Vacations and life-style needs would be a significant expenditure during this phase.
  4. Gifting Phase: the gifting phase of life can occur at the same time as the spending phase. After retirement, excess capital from prior investments or employment can be used to help out loved ones financially. In addition, an individual can donate to charities he or she supports. The gifting phase should have limited risk in order to not face significant losses after their retirement.