Every stage of life has financial implications. What do we have to plan for these stages:
- Starting work and family
- In our middle years with high expenses
- In our pre-retirement years
- In our retirement
Financial Planning As Part of Life Planning
Financial planning focuses on financial goals and how best to meet them. However, since almost every part of one’s life has financial implications, financial planning is just a piece of the larger life planning.Stages of Life
An important aspect of life planning is to plan what one wants to do with one’s life through the different stages of life.
Shakespeare’s seven stages of life can be one categorization. But for financial planning, the four stages in the life cycle which require attention are:
- Starting work and family
- Middle years with high expenses
- Pre-retirement years
- Retirement period
The approach used to identify financial objectives for each stage and to provide the strategies and plans to meet these objectives, while taking care that these must take into account the different objectives for later stages, is called life-cycle planning.
The main concerns are to ensure that strategies and solutions (products and services) are suitable and economic, and continue to be effective and relevant throughout the life cycles. Failure to identify the right solutions can lead to gaps or duplication, or a need to redo, or undo your actions. In the case of insurance, failure to take the right action can kill any further chance if one becomes uninsurable.Starting Work and Family
This is the stage where one has just entered the workforce and has few or zero assets and fairly large expenses or instalments to pay. Income is used mainly to cover living expenses.
The primary worry is what will happen if serious illness, or disability, or premature death strike. Besides the need to take some insurance protection, the main thing is to start a regular savings plan (RSP).
Car and home ownership are big asset items and it is important to plan for them.Middle Years
As you pay instalments for car and home ownership, and as you raise children, there will be little disposable income left. The middle years are characterised by high expenditure but efforts must be made to save and invest for future children’s university education and to prepare for retirement.
It is good to start an investment plan in this stage.Pre-retirement Years
When the children have completed their studies and when you have paid for the owner-occupied property, there will be fair amount of disposable income (income less expenditure). The main concern is to build up your retirement fund and invest in assets that will give attractive gains within reasonable risks.
Wherever possible, save on taxes through CPF contributions, Supplementary Retirement Scheme and schemes and investments which are tax-advantageous (incorporation, tax-deductible medical expenses, key man insurance, capital gains, etc.)Retirement Years
The main concern is whether you can have financial independence and ideally depend on passive income for your living needs. If this is not possible, go for financial freedom where you do not need to work but are able to live comfortably on your assets and investment gains.
The main concern is not to outlive your retirement savings and investments. Annuities are useful products to consider. If you have SRS, you can plan to withdraw gradually over the years from age 62 to 72. If you have a lump sum gratuity or pension, it is important to invest the money well to gain maximum mileage for your retirement years.
If you had planned well, your expected high medical expenses would be adequately taken care of by insurance taken earlier. Be careful to renew all medical policies to avoid a lapse and possibly being stranded because you are now most likely uninsurable.
Those who are financially well endowed will need to do estate planning to ensure that their wealth is passed on efficiently, legally and tax-wise. Wills and trusts are just two things you want to look at. Gifting and ownership issues of insurance policies and other assets must be carefully considered also.Caution
Do it yourself (DIY) can be penny-wise pound-foolish when it comes to life-cycle planning.
A financial plan is only as good as the financial planner.
There are many potholes, roadblocks, detours and cul-de-sacs in the financial planning road. There may be no through road as in the case of being uninsurable. U-turns to undo mistakes can be expensive. Tax savings which are not acted on will be gone. Ill-conceived plans can lead to legal and tax problems.
Financial planning is not expensive and is often FREE.Client-centric Planning
Every plan will be different for different clients with different objectives, financial situations, and risk appetite and tolerance.
Every plan must be client-centric. While the broad principles are the same, the application of the principles, the strategies and solutions differ.Periodic Reviews Are Important
As the name suggests, life-cycle planning is about the different life cycles. It is very important to conceive a good plan to start with, but equally important to monitor, review and reshape the plan as you proceed in life.
For the complete financial planning process, please read further (6-part series on financial planning).
- Financial Planners - A Title In Search Of a Standard (Part 1)
- Financial Planners - Start Well (Part 2)
- Financial Planners - Know Thy Client (Part 3)
- Financial Planners - Goals (Part 4)
- Financial Planners - Implementing the Solutions I (Part 5)
- Financial Planners - Implementing the Solutions II (Part 6)