Financial planning through life stages

Our financial needs, priorities, and goals tend to change as we progress through different phases of our lives.

For example, when we are fresh in the job market in our 20s, we may be focused on paying off university loans, and saving up for our wedding and first home. Young investors also have a longer time horizon to take on riskier strategies.

In contrast, when we are approaching retirement, the focus shifts to wealth preservation. Our investment strategy at this age tends to become more conservative.

Life-stage investing therefore involves tailoring your investment strategy to each stage of your life.

Why is life-stage investing important?

Life-stage investing enables you to establish a sound financial footing so that you can pursue and attain your aspirations.

Looking ahead and planning for the next life stage will give you a better idea of how much you need to save and invest, as well as the amount of risk you can tolerate to reach your financial goals.

In general, we can broadly divide our lives into four stages:

Stage 1: Early career

In our 20s and early 30s, most of us do not have much financial capital, given that we have only just started drawing a salary from work. 

However, this is the perfect time to think about long-term investments. You have a very long time horizon before you will need to begin withdrawing money for retirement. That also means you can better harness the power of compound interest at this stage of your life.

In addition, you are able to tolerate riskier investments that, over long periods of time, are most likely to generate higher returns after riding through the ups and downs of the market.

It is thus a good idea to kickstart your retirement planning at this stage. Other financial considerations when you are early in your career include securing basic life and health insurance while the premiums are still low (due to your younger age); saving and investing for short-term and mid-term needs like marriage, starting a family, and buying a home; and pursuing further education.

You can have separate investment portfolios for your short-term and long-term goals. The difference will lie in the risk profile, as determined by the asset allocation.  If you are aiming to make a down payment for your first home in the near future, that portfolio should have a higher weighting in safer assets such as bonds and money market funds. For longer-term goals like retirement, the portfolio could have a 70% to 90% allocation in equities, depending on your risk tolerance.

Read more: One in two Gen Zs believe that they should invest early — they just don't know how to get started. Learn how you can invest with confidence here.

Stage 2: At mid-career point

We usually reach our peak earnings years in our 40s and 50s, with more substantial capital, and will probably have more complex financial needs and goals than before.

Mid-career investors, as the “sandwich generation”, often juggle the competing financial demands of their children and ageing parents. These may include the costs of the children’s higher education and parents’ healthcare, on top of their own retirement savings.

Ensuring you and your dependants have adequate insurance coverage is one of the important considerations at this life stage. It is also prudent to build an emergency fund for scenarios such as job loss and major illnesses. Be cautious that you do not let “lifestyle creep” eat into your savings — with higher earnings often comes higher spending, which may outpace the increase in income.

Your portfolio at this stage should still include higher-risk assets with the potential for greater returns, because you still have several more decades to draw on your portfolio. 

Nonetheless, you may wish to start taking on more low-risk investments when you’re around your 50s. This may involve reducing the proportion of stocks in the portfolio while slightly bumping up the allocation to high-quality bonds and medium to low-risk funds, for example.

Stage 3: Preparing for retirement 

In your late 50s and early 60s, you are getting ready to retire soon. If you have children, they are already working adults and no longer require your financial support. 

Now is a great time to take a closer look at the viability of your portfolio and your retirement plan, including the decumulation strategy. Recalibrate them if necessary — with several years left to go until retirement, there are still a few levers to pull if it looks like you may have a shortfall. Possible options include topping up your Central Provident Fund (CPF) account, channelling more of your income to savings, or delaying retirement for a few more years.

With retirement so close, it is crucial to reduce risk in your investment portfolio. Shifting allocations towards lower-risk assets, such as short-term and intermediate-term high-quality bond funds, can safeguard your portfolio’s value even if it may not earn you robust returns.

Stage 4: Retirement 

It is time to reap the rewards after working hard for so many years. A good practice during the retirement stage is to preserve your wealth by focusing on low-risk assets such as CPF, government bonds, and fixed deposits.

That being said, with the overall increase in life expectancy and medical advancements, you may also consider maintaining a small portion of your portfolio in wealth-generating assets.

Keep close tabs on your spending, and review your investments regularly. Decide which expenses are essential and which are not, so you can spend wisely and withdraw at a rate that allows you to enjoy your golden years and also ensures the longevity of your portfolio.

Legacy planning is also important, if you want your assets to be managed and distributed in a certain manner after your death. Learn more here.

With Endowus, you can plan and manage your money — whether held in cash, CPF, or SRS — by investing in globally diversified, intelligent, low-cost portfolios seamlessly. To get started, click here.

Next on the Endowus Fin.Lit Academy

Read the next article in the curriculum: Financial planning and investing for married couples

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