Financial Planning for Life Stages
Over a lifetime the financial stages that people will go through will vary enormously. Obviously the financial direction of a 25-year-old is going to be very different from the financial direction of a 75-year-old. This article breaks this journey into four broad categories from age 20 to 35 (starting out), to age 35 to 50 (mortgages and family commitments), to age 50 to 65 (planning for retirement) to retirement (age 65 +) and proposes 4 financial strategies broadly applicable to each stage. Of course the stages for every one will be different and, as always, you should seek your own personal advice.
Across all stages I would suggest that there are broad requirements.
1. Make a will. A will is not for yourself, it is for the beneficiaries of the will. The fact that they are your beneficiaries mean that they are the people that you care about most - so keep an up to date will in place
2. The Government Co Contributions. If you earn less than $58,000 at any stage, and are employed or running a business, think about making a personal contribution to superannuation so that for every dollar you contribute up a certain limit the Government will put in an extra dollar fifty. That is a return of 150% - and is the best return available. Even people earning more than $58,000 should keep this in mind in case they ever take some time off to study, travel or work a part year before retiring - they may be able to take advantage of this then.
Age 20 - 35 (Starting out, getting a first job)
Number 1: 'Don't Run it Off Into the Ditch'
This is the age where a lot of people get into financial stress because of debt. Avoiding consumer debt, credit card debt, car loans and personal loans means that you are not having to use part of every pay packet to pay fees, interest (and effectively the profits) of finance companies. If you are spending more than you earn and racking up debt, it is going to be nigh on impossible to be successful financially.
Number 2: Understand the Power of Compound Interest
The younger you are the longer the period of time you can have your money working for you in investments. Compound interest is the effect whereby investment earnings from this year are re-invested and then earn more next year - and so on. $10,000 invested for 41 years and earning 10 per cent a year will turn into $500,000. However compound interest is a long term effect. The power of it is only effective over time so you must be patient.
Number 3: Insure your income
If you get ill or injured and are unable to earn an income this is a major financial risk for someone early in life. The answer to this risk - get a good income protection policy in place, preferably one that pays a benefit through to age 60 or 65 in case something bad happens (most superannuation income protection policies only pay a benefit for two years).
Number 4: Superannuation
Keep your superannuation in the one, low fee superannuation environment invested mainly in growth assets, seeing as it is a long term investment.
Age 35 - 50 (Mortgage and often family commitments)
Number 1: Get some life insurance if you have debts and family - think about how your family/partner would cope if something bad happened to yourself.
Number 2: Pay off your mortgage with extra repayments. If you mortgage interest rate is 7.5 per cent, making extra repayments 'earns' you a rate of return of 7.5 per cent by saving interest on every loan repayment from then. That compares favourably to a savings account where the after tax return is more like 4.5 per cent. This strategy also provides a buffer should interest rates rise sharply at any time.
Number 3: Keep building your superannuation in growth assets - keeping fees low and your account in the one place.
Number 4: Some long term investments outside of superannuation (which most people can't touch until they are 60) makes sense to provide overall financial flexibility until you can access your superannuation.
Age 50 - 65 (high income years, family becoming independent, preparing for retirement)
Number 1: Salary sacrificing to superannuation saves tax and positions your superannuation in the strongest way leading up to retirement. An average wage earner can save $1,650 a year by salary sacrificing $10,000 to superannuation each year - and the money salary sacrificed to superannuation is then invested in a low tax environment.
Number 2: 'Transition to Retirement' income streams allow people over the age of 55 to take some superannuation benefits as an income stream. People can do this and save tax by salary sacrificing more of their income to superannuation. This is particularly effective after the age of 60 when the superannuation income stream is tax free.
Number 3: Think of a strategy to pay down any debt prior to retirement. You don't want to be servicing debt in retirement.
Number 4: Check your superannuation asset allocation. Some funds automatically shift members to a 'cash' style asset allocation at age 50 or 55. Given that at age 50 you still might have 10 years to retirement and 30 years of retirement this is a long term portfolio that will benefit from the higher expected return of growth assets.
Retirement (age 65 +)
Number 1: Retirement is a long term proposition of 20, 30 or 40 years - don't be too short term in your planning.
Number 2: Think very carefully about inflation - If you invest $1 million today in a cash account returning 6 per cent a year it will provide $60,000 in income. However, in 30 years time $60,000 will buy less than half the goods and services it can today - because of inflation.
Number 3: Look to make the best use superannuation for a tax free retirement. Superannuation income streams for people over the age of 60 are tax free and the earnings of the superannuation fund paying the superannuation income stream are tax free.
Number 4: Understand the Age Pension rules and what you are entitled to there, to help build a complete plan.