Financial timeline: Different moves for different stages

Kevin Price
Kevin Price

If you had a timeline of the financial steps you should take in life, what would it look like? Answers to that question vary, but certain times of life call for certain financial moves. Some should be made out of caution, others out of opportunity.

n What should do in your 20s? Start saving for retirement, preferably using tax-advantaged retirement accounts that let you direct money into equities. Through equity investing, your money could grow and compound profoundly with time — and you have time on your side.

As a hypothetical example, suppose you’re 25 and direct $5,000 annually for 10 years into a retirement account earning a consistent 7 percent. You stop contributing at age 35. In fact, you never contribute a dollar again. Under such conditions, the $50,000 you’ve directed into that account over 10 years grows to $562,683 by the time you’re 65. If you contribute $5,000 annually to the account for 40 years starting at 25, you end up with more than $1 million at 65.

Along with equity investment, you’ll want to build your savings, starting with an emergency fund equal to six months of salary. That might seem unnecessarily large or too grand a goal. But it’s worth pursuing, particularly if you’re married or a parent. You could suffer a disability — not necessarily a permanent one, but an illness or injury that might prevent you from earning income. About 25 percent of people will face just such a challenge during their working lives, according to the Council for Disability Awareness. And less than 5 percent of disabling illnesses and accidents are job-related, so workers’ compensation won’t cover them. According to Money magazine, just 13 percent of millennials have disability insurance.

What moves make sense in your 30s? You might have married and started a family at this point, so your spending has probably increased from when you were single. As you save and invest in pursuit of long-range financial objectives, remember to also play a little defense.   

Create a will and financial power of attorney in case something unforeseen happens. Another estate planning and asset protection move that becomes essential at this point is life insurance. A 20-year, $250,000 term life policy for a 35-year-old can cost less than $30 a month. It won’t build cash value like a permanent policy, but can easily be renewed and in some cases, converted into permanent life insurance.

What considerations emerge between 40 and 50? This is where you might be “sandwiched” between taking care of your children and elderly parents or relatives. Your spending could reach a new peak. Hopefully, your salary has increased as well.

Try to maintain your retirement planning effort in the face of these financial stresses with the pace and level of retirement account contributions. You might have teens or pre-teens at home. If you haven’t yet considered creating a college fund that can grow and compound over time, now’s the time. You shouldn’t dip into your retirement fund to pay for their college educations no matter how onerous college loans might seem.

You might want to look into long-term care insurance. If you’re wealthy or soon will be, it might not be worth buying. You could have the money on hand to pay for years of nursing home care or other forms of care that might be needed as you age. If you find yourself in the middle class, long-term care insurance could be worth the expense depending on your health history and health outlook. Buying long-term care insurance before age 50 and while you’re in good health is a wise move if you’re interested in such coverage. 

Between 50 and 60, you’re in the “red zone” before retirement. If you can, accelerate your retirement saving through greater contribution levels and catch-up contributions allowed for many retirement accounts after age 50. You might want to tolerate less risk in your portfolio as retirement nears, but you might not. Some investment professionals contend that in this era of low interest rates and low inflation, it makes more sense to tilt a portfolio toward equities than fixed-income investments —provided you can put up with the volatility. Other investment professionals feel that’s simply too risky a decision, even with some baby boomers needing larger retirement nest eggs. 

If possible, think about and plan for an approximate retirement date and aim to reduce your debt as much as possible by that time or earlier. Retiring with multiple major debts can be stressful, to say the least. Lastly, check in with a financial professional to gauge how close you are to realizing your long-term financial objectives.